The USD/CNY exchange rate continued rising, reaching its highest level since September 2023. It rose to a high of 7.3315 this week and is nearing its 2007 high of 7.5 as concerns about trade wars and the ongoing China’s deflation continues.
China’s deflation and falling bond yields
The USD/CNY surge occurred as China’s bond yields and inflation continued to decline. Data compiled by TradingView shows that the 30-year yield of government bonds has plunged to 1.87%, the lowest level in decades.
The ten-year yield has dropped in the last 15 consecutive weeks and was trading at 1.60%, also its lowest point in years. Similarly, the five-year yield has moved to 1.40% and the downward trend is gaining steam.
These yields have crashed as investors anticipate a more dovish People’s Bank of China (PBoC) as the economic growth slows and deflation continues.
A report released on Thursday showed that the producer price index (PPI) dropped by 2.3% in December after falling by another 2.5% in November. The headline CPI moved to 0.0% on a MoM basis and slowed to 0.1% on a YoY basis.
Ideally, a country with low inflation is better than one with rising prices. However, a prolonged period of deflation or low inflation can indicate a country’s lack of success, as it indicates weak consumer spending. A good example is Japan, which has experienced no inflation or wage growth for over two decades.
Analysts expect the PBoC to cut interest rates and bank reserve requirements this year. If this happens, analysts see it slashing rates from the current 1.5% to possibly to below 1%. By reducing the reserve requirements, it hopes to unlock billions of dollars.
The USD/CNY exchange rate has continued to soar amid fears of a trade war with the US, which could affect China’s economy. Donald Trump has pledged to restart his trade war with China because of its ongoing trade deficits.
Most analysts believe that Trump is wrong about trade, deficits, and tariffs. His view is that increasing tariffs will push more manufacturing companies to the US, which won’t happen because of the cost of doing business. Some US states have a minimum wage of almost $20 a hour. In China, wages cost less than $3.5 a hour.
Strong US dollar index
The USD/CNY exchange rate has also surged because of the ongoing US dollar strength. The US dollar index has soared from $100 in 2024 to over $109, a trend that may continue. Besides, as we wrote on Wednesday, the 30-year yield inverse head and shoulders chart pattern pointing to more gains in the near term.
The US dollar index has risen as investors anticipate fewer interest rate cuts this year. After delivering three cuts in 2024, the Fed has now hinted that it will deliver just two cuts later this year.
This view has pushed the USD much higher than most developed and developing countries. For example, the GBP/USD pair has crashed to the lowest point in months, while the EUR/USD pair is nearing parity.
USD/CNY technical analysis
USDCNY chart by TradingView
The daily chart shows that the USD/CNY pair has been in a strong uptrend in the past few months. It recently crossed above the key resistance at 7.2765, its highest swing in July last year.
The pair has remained steady above all moving averages, while oscillators have continued to tilt upwards. Therefore, the path of the least resistance is upwards, with the next point to watch being at 7.50.
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