China’s strong yuan despite mixed data

China published mixed economic data noting a slowdown in a year-over-year comparison, but some of the data exceeded expectations. The Chinese renminbi has been on the offensive against the US dollar for the past week, bringing USDCNH back to test the lows of the past six months.

The economy grew by 1.6% last quarter after 0.2% previously. However, the GDP growth was 4.0% y/y – the lowest since the second quarter of 2020. Industrial production added 4.3%, markedly better than the expected 3.7%.

December retail sales data disappointed with growth slowing to just 1.7% y/y, the lowest since August 2020.

Weakness in domestic demand data has not stopped the demand for the Chinese renminbi, which is testing the 6.35 mark for the second month. Since the beginning of December, the pair has bounced out of this area. Earlier in May 2021, we also witnessed a prolonged reversal near this level. The USDCNH traded steadily lower from January to May 2018 but turned to the upside at the start of the trade wars.

The yuan has settled well, consolidating in a narrow range since late October, which has created the potential for a resumption of the trend. A firm consolidation below 6.35 at the end of the week or the month would be an essential signal for starting a new downward wave. However, we cannot rule out the possibility of another bounce from these levels for the time being.

The FxPro Analyst Team