AUD/USD, China A50 higher on China’s deflation (but will CPI keep falling?)

The headline inflation rate for China deflated for the first time since January 2021 at -0.3% y/y. And that’s a big deal with China being a key export nation, as importers and consumers of their trade partners stand to benefit from lower prices. And with lower inflationary pressures overseas, it removes pressure from central banks to continue hiking interest rates (and dare we say, stoke hopes of interest rate cuts). On the other hand, it also points to lower growth for China and the rest of the world. But we are at the point where lower growth is a necessary evil to achieve lower inflation, with central banks aiming for a soft landing over an outright global recession.

The question now is whether prices will continue to fall and for how long. My concern is that it won’t e very low for very long. If we look back at recent history, China’s inflation rate has spent very little time in negative territory. Their large population and increased demand for goods globally provides a natural level of support for consumer prices. The central authorities also have control over the currency and allow it to slide to boost exports which in turn supports prices, at least to a degree.

Stimulus is (still) coming, and the CESI points towards an economic trough

But perhaps more importantly are the stimulus measures being made which can provide further support for prices, if not send them higher. The PBOC (People’s Bank of China) has cut interest rates and lowered reserve requirements for banks. The Chinese government has announced plans to cut taxes for businesses and individuals with the intention of boosting consumer spending and investment. Plans have also been announced to increase spending on infrastructure and other projects. Furthermore, the government have also announced plans to invest heavily in green energy to help create jobs and boost economic growth (ahem… while also reducing pollution).

While these are just some of the stimulus measures that China has announced this year, the government is likely to continue to announce more measures in the coming months, as it seeks to boost economic growth and prevent a slowdown. It remains debatable whether these measures will be sufficient to boost the economy back to the "good old days" of 6%+ GDP growth.

However, it is possible that China's economy will outperform weak expectations and send inflation higher as we head into 2024. And that could prevent central banks from cutting interest rates sooner than later, as markets so desperately want.

If we look at the CESI (Citigroup Economic Surprise Index), it has moved up form its 52-week lows which means economic data has not been as weak as anticipated. Given this index oscillates in clear cycles, we could expect the CESI to revert to positive territory as stimulus measures take effect and help economic data outperform gloomy forecasts.

AUD/USD gets a boost from NZ data and stronger yuan

USD/CNH fell around -0.3% following the inflation report, whilst AUD/USD mustered up the energy to rise 20-pips - presumably on hopes of a weaker US inflation report. News that New Zealand’s 1-year CPI expectation ha risen 4bp provided AUD/USD with another move higher, following its breakout from a bullish flag pattern on the 1-hour chart. From here, it remains plausible that AUD/USD has seen a spike low around 65c following weak trade data from China on Tuesday and now headed for the July low.

US inflation will be a key driver for markets in general, and AUD/USD will be no exception. We need to factor in the ‘basing effect’ which may see inflation levels in the US rise, but I have made the assumption that this has been accounted for in forecasts. We may need to see US inflation come in lower than expectations to send AUD/USD materially higher this week, but of course CPI lower than previous would be ideal.

China A50 4-hour chart:

The China A50 posted a strong rally in the last full week’s trading of July and is now within its second week of its retracement. I highlighted my bullish bias late July, noting its reluctance to break beneath 12,400 despite all of the negative sentiment surrounding China’s economic data. We’ve since seen the break of trend resistance, and a base is building around the 200-day EMA.

The 4-hour chart shows a potential double bottom around the 200-day EMA and 61.8% and 32.8% Fibonacci levels. That its also holding above 13k adds extra weight to the bias for another leg higher from here. We can see on the 1-hour chart that prices have popped higher, so perhaps we’re witnessing the early stages of its next leg higher. A break below 13,000 will quickly invalidate that bias.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

StoneX Europe Ltd makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. We are not under any obligation to update any such material. Any opinion made may be personal to the author and may not reflect the opinion of StoneX Europe Ltd.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Please ensure you fully understand the risks involved by reading our full risk warning.

FOREX.com is a trading name of StoneX Europe Limited, and FOREX.com/ie is a domain operated by StoneX Europe Ltd, a member of StoneX Group Inc. StoneX Europe Ltd, is a Cyprus Investment Firm (CIF) company registered to the Department of Registrar of Companies and Official Receiver with a Registration Number HE409708, and authorized and regulated by the Cyprus Securities & Exchange Commission (CySEC) under license number 400/21. StoneX Europe is a Member of the Investor Compensation Fund (ICF) and has its registered address at Nikokreontos 2, 5th Floor, 1066 Nicosia, Cyprus.

StoneX Europe Limited is registered with the German Federal Financial Supervisory Authority (BaFin). BaFin registration ID: 10160255

FOREX.com is a trademark of StoneX Europe Ltd, a member of StoneX Group Inc.

The statistical data and the awards received refer to the Global FOREX.com brand.

This website uses cookies to provide you with the very best experience and to know you better. By visiting our website with your browser set to allow cookies, you consent to our use of cookies as described in our Privacy Policy.

Through passporting, StoneX Europe is allowed to provide its services and products on a cross-border basis to the following European Economic Area ("EEA") states: Austria, Bulgaria, Croatia, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden.

Additionally, StoneX Europe Ltd is allowed to provide Investment and Ancillary Services to the following non-EU jurisdiction: Switzerland.

StoneX Europe Ltd products, services and information are not intended for residents other than the ones stated above.

Tied Agent Information: KQ Markets Europe Ltd with Company No. HE427857.
Address: Athalassas 62, Mezzanine, Strovolos, Nicosia Cyprus.
Services Provided: Reception and Transmission of Orders.
Commencement Date: 06/12/2022
Website: KQ Markets - CFD Trading | KQ Markets

We may pay inducements, such as commissions or fees, to affiliates or third-party introducers for referring clients to us. This is in line with regulatory guidelines and fully disclosed where applicable.

StoneX Europe Ltd may make third party material available on this website which may contain information included but not limited to the conditions of financial markets. The material is for information purposes only and does not contain, and should not be construed as containing, investment advice and/or investment recommendation and/or an investment research and/or an offer of or solicitation for any transactions in financial instruments; any decision to enter into a specific transaction shall be made by the client following an assessment by him/her of their situation. StoneX Europe Ltd makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. We are not under any obligation to update any such material. Any opinion made may be personal to the author and may not reflect the opinion of StoneX Europe Ltd.