The Chinese renminbi has bounced back in the past few weeks as the market ignored the ongoing trade tensions between the US and China. The USD/CNY exchange rate has plunged to a low of 7.2335, its lowest level since November 25. It has dropped by over 1.3% from its highest level this year.
China deflation concerns remain
The USD/CNY exchange rate retreated as concerns that the Chinese economy was going through a period of deflation rose.
Data released on Sunday showed that the headline Consumer Price Index (CPI) crashed from 0.7% in January to minus 0.2% in February. It dropped by 0.7% on a year-on-year basis, missing the estimated decline of 0.4%.
Another report showed that the country’s producer price index (PPI) dropped to minus 2.2% in February, missing the estimated drop of minus 2.0%.
These numbers mean that the country is not close to exiting deflation. They also imply that the situation is moving downwards.
Most importantly, the weak inflation data mean that the central bank may need to cut interest rates further this year. Some analysts are predicting at least two or three cuts this year.
These numbers came after China released a series of encouraging economic data. The manufacturing PMI report released this month showed that the sector continued to grow in February.
China has made several actions to boost growth. Beijing introduced stimulus last year, which helped the economy to grow by 5.4% in the fourth quarter. These stimulus helped the country to reach its 5.0% annual growth target.
China is now facing more challenges as Donald Trump has launched a trade war with it. He has implemented large tariffs on goods from China, a trend that may affect demand. However, historically, data shows that US tariffs did not lower exports to the country.
Falling US dollar index
The USD/CHF exchange rate has also dropped because of the falling US dollar index (DXY). This index has retreated from $110 this year to $103.2 as the greenback has plunged against most currencies.
The index has plunged as investors anticipate that the Federal Reserve will need to cut interest rates more times this year. The bank has already slashed rates three times since last year, and it guided towards two cuts this year.
Recent US economic data showed that the economy is starting to slow. For example, consumer confidence plunged in February, which may affect their spending. This slowdown will continue as Trump tariffs remain.
USD/CNY technical analysis
USDCNY chart by TradingView
The daily chart shows that the USD/CNY exchange rate has pulled back in the past few days. It has dropped from a high of 7.333 in January this year to the current 7.2335.
The pair dropped below the crucial support at 7.2765, the highest swing in July 2024. Also, the MACD indicator has moved below the zero line, while the Relative Strength Index (RSI) has pointed downwards. Therefore, the pair will likely keep falling as sellers target the next key support at 7.20.
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