Chinese Yuan Renews Gains on Market Rally, Positive Data

The Chinese yuan is looking to start another winning streak after the currency suspended its momentum against the US dollar. The yuan has been on a tear in recent months, testing 6.8 against the greenback, primarily due to favorable domestic economic data and a weakening buck. But escalating US-China tensions and the plunge in equities in recent sessions could limit the yuan’s gains – for now.

According to the National Bureau of Statistics, the annualized inflation slipped to 2.4% in August, down from 2.7% in July. The reading matched market expectations. The consumer price index (CPI) did rise 0.4% month-over-month in August, down from the 0.6% gain in the previous month. Food inflation surged 11.2%, medical care rose 1.5%, and education and culture were flat. Prices did slump for transportation (-3.9%); rent, fuel, and utilities (-0.7%); and apparel (-0.5%).
Producer prices declined for the seventh consecutive as the producer price index (PPI) fell 2% year-on-year. The means of production cost dropped 3%, led by raw materials (-6.4%), extraction (-5.8), and processing (-1.4%).
Earlier this week, the trade surplus for August came in as $58.93 as imports tumbled 2.1% to $176.3 billion YoY. Exports surged at a better-than-expected rate of 9.5% to $235.3 billion, driven by record shipments of medical supplies, electronic products, refined products, and unwrought aluminum.
The People’s Bank of China (PBoC) reported that foreign exchange reserves totaled $3.165 trillion last month, up from $3.154 trillion in July. The market had penciled in a reading of $3.176 trillion.
In other news, the PBoC’s open market operations produced a net liquidity withdrawal from the banking system. Last week, the central bank injected $40.94 billion into the market through reverse repurchasing agreements, but more than $73 billion of reverse repos matured.
The deteriorating relations between Washington and Beijing have put pressure on the yuan. The US has proposed to slap a ban on chipmaker SMIC that could threaten the semiconductor industry in the world’s second-largest economy. There are also reports that the administration could target Tencent’s WeChat mobile application. Analysts are paying attention to electoral polling data, too, as the 2020 result in November could impact US-China negotiations.
The USD/CNY currency pair slipped 0.19% to 6.8338, from an opening of 6.8446, at 14:16 GMT on Wednesday. The EUR/CNY advanced 0.19% to 8.0772, from an opening of 8.0623.
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