Chinese Yuan: Reflation gap weighs against US Dollar – Commerzbank

Commerzbank analysts highlight that China’s June Consumer Price Index (CPI) slowed to 1.0% year-on-year while Producer Price Index (PPI) rose 4.1%, widening the PPI-CPI gap and squeezing downstream margins. The PBoC acknowledged “structural divergence” between high-tech strength and weak consumption. Despite this backdrop, USD/CNY and USD/CNH both fell, reflecting some currency strength even as domestic demand remains subdued.

China reflation momentum softens

"China's reflationary recovery lost further traction in June, with CPI rising 1.0% yoy (Bloomberg consensus: 1.1%) vs 1.2% in both April and May. The reading marks the slowest CPI print in three months and reinforces concerns that domestic demand remains structurally weak even as the broader economy stabilises."

"Core CPI, which excludes food and energy, also came in at 1.0% yoy against an expected 1.1%, signalling that underlying demand-side price pressures have yet to broaden in a meaningful way."

"The producer price index told a different story, rising 4.1% yoy in June, in line with consensus and up from 3.9% in May, sustained by elevated upstream input costs tied to metals and energy. The widening gap between factory-gate inflation and subdued consumer prices continues to compress margins for downstream producers unable to pass costs through to end consumers."

"In FX, USD/CNY fell 140 pips to 6.79 and the offshore USD-CNH fell 100 pips to 6.80 yesterday."

"Industrial profit growth also showed early signs of fatigue, with the year-on-year gain softening for the first time since November, suggesting that strong exports and price gains are no longer sufficient to offset weak domestic demand."

"The two-speed dynamic is equally visible at the sectoral level. PBoC’s quarterly monetary policy committee statement, released Wednesday, introduced new language acknowledging “structural divergence” within the economy, a characterisation the central bank had not previously used, reflecting the growing imbalance between AI-driven high-tech sector outperformance and tepid consumer spending."

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