USD/CNH refreshes YTD top despite China banks’ defense of Yuan as PBoC cuts rates, economic fears grow

• USD/CNH refreshes yearly high on softer China data, PBoC rate cut.
• China Industrial Production and Retail Sales ease for July, PBoC cuts MLF, Reverse Repo rates.
• China Stats Bureau accepts challenges to economic recovery but stays hopeful for further moves.
• Cautious mood before US Retail Sales also underpins Yuan’s weakness even as China banks sell Dollars to defend domestic currency.

USD/CNH bulls cheer a slew of downbeat catalysts surrounding China to refresh the yearly high to 7.3126 during early Tuesday, close to 7.2940 by the press time. In doing so, the offshore Chinese Yuan (CNH) also ignores the US Dollar’s retreat from the monthly high ahead of the US Retail Sales data. However, comments from China Stats Bureau Official and the Chinese banks’ efforts to defend the Yuan, via the money market operations, prod the pair buyers of late.

Earlier in the day, China's central bank, the People’s Bank of China (PBOC), lowered the one-year Medium-term Lending Facility (MLF) rate to 2.50% from 2.65% previous, as well as cut the reverse repo rate to 1.8% from 1.9% previously.

Following that, China’s July Retail Sales rose 2.5% YoY vs. 4.8% expected and 3.1% previous while the country’s Industrial Production came in at 3.7% YoY vs. 4.5% estimated and 4.4% prior.

Recently, Reuters cites an anonymous source to state that China's major state-owned banks were seen selling US Dollars to buy China Yuan (CNY) in the onshore spot foreign exchange (Forex) market.

It’s worth noting, however, that China State Bureau Spokesperson Fu Linghui crossed wires, via Reuters, to defend the USD/CNH traders while saying that there is no deflation in China, as well as saying that there will be no deflation in the future. It’s worth noting, however, that the policymaker also accepted the challenges the economic recovery faces and also conveyed expectations that China's economy to maintain steady operations in the second half of the year.

On the other hand, the US Dollar Index (DXY) retreats from the highest level in five weeks after witnessing downbeat inflation clues. That said, the New York Fed’s one-year inflation expectations eased to 3.5% for July, down three points by falling to the lowest level since April 2021. New York Fed survey, however, also suggested confidence in positive labor market conditions and economic transition.

It should be noted that the comments from US Treasury Secretary Janet Yellen, who turned down fears about the US economy emanating from a likely slowdown in China, appear to favor the sentiment and prod the USD/CNH bulls of late. Even so, US Treasury Secretary Yellen cited the risks to the global economic developments from China’s slowdown, the Russia-Ukraine war and climate change-related disasters, as well as their spillover effects.

Amid these plays, the S&P500 Futures print mild gains and the US 10-year Treasury bond yields seesaw around the highest level since November 2022, marked the previous day.

Moving on, the US Retail Sales for July, expected 0.4% MoM versus 0.2% prior, will be important to watch for clear directions.

Technical analysis

A daily closing beyond the downward-sloping resistance line from October 2022, now immediate support around 7.2715, directs the USD/CNH bulls toward the previous yearly peak of around 7.3750.