USD/CNH renews six-month high above 7.1500 as Fed vs. PBoC divergence is likely to widen

• USD/CNH rises for the fifth consecutive day to prod late November 2022 high.
• Multiple Chinese banks cut rates to fuel speculations of PBoC rate reduction.
• Market sentiment dwindles amid fresh fears of economic slowdown, higher rates.
• China inflation, second-tier US data can entertain traders ahead of the key next week.

USD/CNH remains on the front foot at the highest levels in six months, mildly bid near 7.1530 during early Thursday, as fears of the Federal Reserve’s (Fed) rate hikes contrast with the concerns that the People’s Bank of China will cut the benchmark rates. That said, the market’s fears of economic slowdown also weigh on the offshore Chinese Yuan (CNH).

That said, a slew of Chinese state banks including the Industrial and Commercial Bank of China, Bank of China and Construction Bank cut their benchmark rates. The same raises speculations that the Chinese central bank, namely the People’s Bank of China (PBOC), will also cut the rates.

Alternatively, China’s Director of China's National Administration of Financial Regulation Li Yunze recently mentioned that the economy is still recovering.

On the other hand, the latest increase in the market’s bets on the Federal Reserve’s 25 bps rate hike in July increased, even as the June Federal Open Market Committee (FOMC) is likely to keep the rates unchanged, propel the USD/CNH price even as the US Dollar struggles of late.

Previously, the risk profile soured on the latest Organisation for Economic Co-operation and Development (OECD) report that said that the global economy is set for a weak recovery over the coming years as persistent core inflation and tighter monetary policy weigh on demand. The OECD report also mentioned, “Sees Chinese growth of 5.4% in 2023 and 5.1% in 2024 (previously 5.3% in 2023 and 4.9% in 2024).”

Against this backdrop, the US 10-year bond coupons remain mostly unchanged at 3.79% by the press time whereas the two-year yields grind higher to 4.54% as we write. While portraying the market’s mood, Wall Street closed mixed and S&500 Futures struggle for clear directions.

Looking forward, USD/CNH traders may need to keep their eyes on the risk catalysts for clear directions, which in turn highlights headlines surrounding growth and central banks. That said, Friday’s China inflation data will crucial to watch ahead of the next week’s all-important Federal Open Market Committee (FOMC) monetary policy meeting.

Technical analysis

A one-month-old bullish trend channel, currently between 7.1830 and 7.1000, restricts short-term USD/CNH moves while keeping the bulls hopeful.