China struggles to support CNY amp avoid exporting disinflation

The People’s Bank of China is increasingly resisting traders’ weakening of the Chinese yuan, by announcing higher rate in its daily central reference rate. But as Chinese data continue to weaken across the board, FX traders have no choice but to bet against the yuan (pushing up the USD/CNY rate).

The chart highlights the divergence between the PBOC’s falling reference rate, known as CNY fixing price as set by the China Foreign Exchange Trading System (red) and the spot rate in the interbank market, the fluctuations of which should not exceed +/- 2% of the average price.

Trade the Chinese yuan with City Index here

Aside from signs of China’s slowdown shown in retail sales and consumer credit, last night’s release of Nov PPI contracting by 2.7% — below zero for the 13th consecutive months — and the 1.4% CPI being the lowest in five years underscores the threat that China’s hard landing story is at its most credible status since misplaced warnings have begun in 2009.

The adjacent chart highlights China’s deteriorating capital account balance, which tumbled to a negative $601 million in Q2 as a result of surging capital outflows. We patiently await the release of capital account breakdown for Q3.

Deflation: Made in China

With much focus placed on central bank policies, and OPEC decision and the price of commodities all pointing in the direction of disinflation, China’s weakening currency will be the next “major theme” to watch. USD has gained less than 1% against CNY so far this month. But if the yuan descends into a fall of more than 10% (it’s down 1.6% since October highs), brought about by signs of a hard Chinese landing, then the commodities story will break into deflationary spiral, exacerbated by China’s exporting of disinflation.

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. CFD and Forex Trading are leveraged products and your capital is at risk. They may not be suitable for everyone. Please ensure you fully understand the risks involved by reading our full risk warning.

City Index is a trading name of StoneX Financial Ltd. Head and Registered Office: 1st Floor, Moor House, 120 London Wall, London, EC2Y 5ET. StoneX Financial Ltd is a company registered in England and Wales, number: 05616586. Authorised and regulated by the Financial Conduct Authority. FCA Register Number: 446717.

City Index is a trademark of StoneX Financial Ltd.

The information on this website is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement.