CNY: Still facing the threat of deflation - Commerzbank

The latest inflation figures were published in China over the weekend, reporting on price developments in April. Consumer prices rose by 0.1% month-on-month, but the annual price change remained negative for the third consecutive month at -0.1%. Meanwhile, producer prices fell by 0.4% month-on-month and by 2.7% year-on-year. Producer prices have now been in negative territory for 31 consecutive months, and there are currently few signs that this will change soon, Commerzbank's FX analyst Volkmar Baur notes.

USD/CNY is back below 7.20 for now

"Notably, the price trend in the two subcategories of mining and raw materials, which typically lead the overall PPI, has recently shown an intensifying negative trend. This suggests that producer prices are likely to remain negative in the coming months. However, indications in the producer price subcategories also suggest that consumer price trends will remain low."

"Yesterday's agreement between the US and China to dramatically reduce mutual tariffs for an initial period of 90 days should have a positive impact on price developments (see above). However, China's move towards deflation has been ongoing for much longer and is likely to be only marginally affected by this improvement."

"Inflation therefore remains low and close to deflation. Further interest rate cuts by the central bank are perhaps not to be expected in the short term. Structurally, however, the direction is likely to be clear. Even though the CNY has enjoyed political tailwinds for a few days and USD/CNY is back below 7.20 for now, the CNY is more likely to weaken in the medium term."