Chinese Yuan: Uptrend intact with muted inflation against US Dollar – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad reports that USD/CNH continues to drift lower to its weakest level since January 2023 as China’s August Consumer Price Index (CPI) rose modestly while overall inflation remains subdued. With CPI lagging Producer Price Index (PPI) and firms’ pricing power constrained, Haddad argues that a stronger Chinese Yuan (CNY) could support a shift toward consumption-led growth, keeping the USD/CNH downtrend in place.

Muted CPI supports stronger Chinese Yuan

"USD/CNH continues to drift lower, reaching its lowest level since January 2023. China August CPI rises but inflation remains muted. Headline CPI matched consensus at 0.8% y/y vs. 0.5% in July driven by communication equipment and energy. Both core CPI and PPI exceed expectations in August at 1.0% y/y (consensus: 0.9%, prior: 0.9%) and 3.8% y/y (consensus: 3.6%, prior: 3.5%), respectively."

"Subdued CPI relative to PPI inflation indicate firms have limited pricing power to pass higher costs onto consumers, squeezing profit margins, and underscoring still soft domestic demand. In our view, a continued appreciation in China’s currency can help the country shift its growth model towards consumer spending by boosting disposable income through cheaper imports. Bottom line: USD/CNH downtrend is intact."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)