Home Forex News USD/CNY Grinds to Five-Month Low on Yuan Strength

USD/CNY Grinds to Five-Month Low on Yuan Strength

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  • Upbeat China CPI
  • China Economy Recovery Hopes
  • Hong Kong Security Law Risk

USD/CNY exchange rate dropped to a five-month low breaking the 7.0 barrier for the first time since March. The plunge came on the Yuan strengthening as the U.S dollar weakened on growing hopes of global economic recovery from the COVID-19 pandemic.

Yuan Strength

The USD/CNY exchange rate was down by more than 0.2% to lows of 6.9871 as better than expected Consumer Price Index data for June affirmed hopes of China economic recovery. The Chinese Yuan has gained more than 1.1% against the dollar since the start of the week as traders react to better than expected economic releases in the world’s second-largest economy.

A report by the National Bureau of Statistics showed that consumer prices in China rose 2.5% in June, much higher than a 2.4% increase registered in May and above 2.6% consensus estimates. With the reopening of the Chinese economy, in the aftermath of COVID-19 lockdowns, food prices rose 2.5% in June after rising 2.4% in May. As Consumer Price Index rose, the Price Producer Index moderated in June as commodity prices rose on the global scene. The PPI was down by 3% from a year earlier, much better than a 3.7% increase recorded in May.

A resurgent Chinese economy should continue to support the Chinese Yuan that had weakened against the dollar to 12-year lows. Data released in recent weeks affirm accelerated economic recovery with manufacturing and services PMI jumping sharply in June. A spike in prices for industrial metals supports the notion that the economy is on a recovery path.

Safe Haven Demand

On the other hand, the U.S dollar remains steady as a spike in coronavirus cases in the U.S continues to fuel demand for the safe haven. The number of coronavirus cases has already clocked highs of 3 million, with the country registering daily record cases of about 60,000.

Escalating tensions between Washington and Beijing over Hong Kong security law is another tailwind that could fuel risk aversion in the market, forcing traders into safe-havens such as the dollar. Conversely, the USD/CNY remains susceptible to further gains on the dollar, strengthening on risk aversion.

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