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Chinese Yuan Forecast: Q2 GDP Key to Gauge PBOC, USD/CNH Outlook

Chinese Yuan Forecast: Q2 GDP Key to Gauge PBOC, USD/CNH Outlook

Thomas Westwater, Analyst

Chinese Yuan, PBOC, Gross Domestic Product - Talking Points

  • Asia-Pacific markets may recover after Wall Street bounces
  • China’s Q2 GDP in focus as traders gauge path for PBOC policy
  • USD/CNH falls to fresh monthly low but finds support at EMA
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Thursday’s Asia-Pacific Outlook

The Asia-Pacific trading session is set for a busy day, with several potentially hard-hitting economic events on tap. Australia’s June employment report will cross the wires at 01:30 GMT. Analysts are looking for 20k jobs to be added, with the unemployment rate to hold steady. China’s gross domestic product (GDP) for the second quarter will follow, along with industrial production, retail sales, and fixed asset investment data. That said, the Chinese Yuan and Australian Dollar will be in particular focus today.

Equity markets in the region may move higher after Wall Street indexes partially recovered losses from Tuesday. Treasury yields retreated as Federal Reserve Chair Jerome Powell told a House committee that the central bank still views inflation as temporary, despite a recent uptick in CPI numbers. The Fed Chief said the recovery “is still a ways off” from hitting its targets. The tech-heavy Nasdaq-100 led stocks higher, although only modestly, closing 0.17% higher.

Hong Kong’s Hang Seng Index (HSI) closed 0.63% lower on Wednesday. Regulatory fears, along with worries that the Chinese economic recovery is losing steam, have kept sentiment capped. The People’s Bank of China’s (PBOC) recently announced cut to reserve requirement ratio’s take effect today. The move will inject near 1 trillion Yuan into the Chinese economy.

China RRR

Still, the PBOC signaled that the move shouldn’t be interpreted as diverging away from its prudent stance on policy. While growth is expected to decline, China’s recovery is forecasted to outpace other major economies. The International Monetary Fund (IMF) sees GDP increasing by 5.6% in 2022. In fact, this week’s trade data showed an unexpected pickup in export growth, which boosted China’s trade surplus to the highest level since January.

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The Yuan appreciated against the US Dollar following the upbeat trade data. USD/CNH fell sharply last year, and while prices have moderated, the currency is less than 2% away from 2018 lows. Chinese government bond yields continue to fall, reducing the differential between Treasuries. The spread between the Chinese 10-year and US 10-year has narrowed to 161 basis points. That spread has the potential to fall further if the PBOC eases further. The Yuan would likely weaken as the government’s debt becomes less attractive to foreign buyers, culling the demand for the currency.

That said, an upbeat GDP print today may cool bets on another round of PBOC easing. Analysts expect the Q2 y/y GDP figure to cross the wires at 8.1%, down from Q1’s 18.3% growth rate. Retail sales, industrial production, and fixed asset investment are also expected to ease. The economic figures will provide key insights into the Chinese recovery, which could help guide the markets to where the PBOC’s next step is.

USD/CNH Technical Outlook:

The Yuan fell overnight versus the Greenback, pushing into a fresh July low. However, the rising 26-day Exponential Moving Average along with the 38.2% Fibonacci retracement level underpinned prices. A drop lower could see prices move back into a trendline from 2014. The July high at 6.5000 may serve as resistance if prices turn high.

USD/CNH Daily Chart

usdcnh chart

Chart created with TradingView

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--- Written by Thomas Westwater, Analyst for DailyFX.com

To contact Thomas, use the comments section below or @FxWestwater on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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