USD/CNH extends recovery to near 6.7700 despite mix signals from China’s inflation

• USD/CNH has picked strength amid a sheer contraction in China’s factory gate price index by 0.7%.
• The upbeat market mood is weighing on the US Treasury yields.
• A decline in energy prices may result in further softening in the US inflation.

The USD/CNH pair has recovered after dropping to near 6.7550 in the Asian session. The asset has sensed demand and has extended recovery to near 6.7700 despite China’s National Bureau of Statistics (NBS) having reported mixed Consumer Price Index (CPI) data for December.

The annual CPI figure has remained in line with the expectations at 1.8% and higher than the former release of 1.6%. While, the price index at the factory gate has dropped sharply, signaling less bargaining power from producers. The Producer Price Index (PPI) has shrunk by 0.7% vs. the expectation of 0.1% contraction.

The sheer pace adopted by the Chinese administration in reopening the economy after a stretched lockdown period to combat the Covid-19 pandemic has brought a sense of optimism among market participants. The street is expected a vertical recovery in economic prospects and international trade.

Analysts at Morgan Stanley raised their forecast for China’s Gross Domestic Product (GDP) this year to above 5.0%. They further added that "If policy can remove barriers to the housing/property sectors and recovery from COVID zero then China's economic recovery should solidify starting in Q2 of this year."

Meanwhile, higher investors’ risk appetite led by string recovery in S&P500 futures this week is showing strength in risk-sensitive assets. The 10-year US Treasury yields have been weighed down by the upbeat market mood to 3.55%. The US Dollar Index (DXY) has faced barricades around 102.80 and has tilted towards the south ahead of United States inflation data.

Analysts at Wells Fargo expect another sizable decline in energy prices to weigh on the headline and offset further gains in food and core services prices. But the drop in prices should also be helped along by another decline in core goods, led once again by used autos.