USD/CNH struggles to cheer softer DXY above 7.0000 on pessimism surrounding China

USD/CNH pares the first daily loss in seven around 7.6150 as it fails to cheer a pullback in the US dollar amid downbeat catalysts surrounding China. In doing so, the offshore Chinese currency (CNH) pair also portrays the market’s anxiety ahead of the critical US data.

“Economic growth in East Asia and the Pacific will weaken sharply in 2022 due to China's slowdown, but the pace of expansion will pick up next year, the World Bank said on Tuesday,” per Reuters. The news Also mentioned that the Washington-based lender said in a report it expected 2022 growth in the East Asia and Pacific region, which includes China, to slow to 3.2%, down from its 5.0% forecast in April, and the previous year's growth of 7.2%. The weaker forecast was due mainly to a sharp slowdown in China, caused by its strict zero-COVID rules that have disrupted industrial production, domestic sales and exports, the World Bank said.

On the same line, China’s Industrial Profits YTD dropped to -2.1% in August versus -1.1% prior. Also, China's central bank stepped up cash injection towards the quarter-end by making the biggest daily offering in seven months on Tuesday, per Reuters, favouring USD/CNH buyers.

That said, US Dollar Index (DXY) retreats from the fresh 20-year high marked the previous day as traders recalibrate emanating from the GBP/USD’s slump to the all-time low. Also weighing on the US dollar are the upbeat Treasury yields.

That said, US Treasury yields retreat from the multi-year high while the S&P 500 Futures also print mild gains by the press time. That said, US 10-year Treasury yields rose to the highest levels in 12 years while the 2-year bond coupons refreshed the 15-year top as traders rushed to the risk safety. Further, Boston Fed President Susan Collins said, per Reuters, “Getting inflation down will require slower employment growth, somewhat higher unemployment rate”. Following that, Cleveland Fed President Loretta Mester said on Monday that if there is an error to be made, better that the Fed do too much than to do too little.

Furthermore, the recent softer US data and inflation expectations should have also weighed on the USD/CNH prices.

Chicago Fed National Activity Index weakened to 0.0 in August versus 0.09 market expectations and an upwardly revised prior reading of 0.29. Further, the US inflation expectations as per the 10-year and 5-year breakeven inflation rates per the St. Louis Federal Reserve (FRED) data, signaled that the gauges refreshed the multi-day low on Monday. While noting the details, the longer-term inflation expectations dropped to the lowest level since July 13, 2022, whereas the 5-year benchmark slumped to the lowest levels since June 2021 with the latest figures being 2.32% and 2.33% respectively.

However, the fears of more central bank intervention, even as the People’s Bank of China (PBOC) announced reserve-related moves the previous day, keep the USD/CNH buyers hopeful. The US CB Consumer Confidence for September and Durable Goods Orders for August will be crucial to watch for intraday guidance.

Also read: US Consumer Confidence Preview: Near-term relief or more risk aversion?

Technical analysis

USD/CNH remains on the bull’s radar unless breaking a two-week-old support line, around 7.0900 by the press time.