USD/CNH soars above 6.9750 as China prints deflation

• USD/CNH has scaled above 6.9750 as the Chinese economy has registered a deflation by 0.5%.
• Producers have lowered prices of goods and services at factory gates due to sluggish demand.
• Upbeat US ADP Employment data has confirmed that January’s strong data was not a one-time blip.

The USD/CNH pair has jumped above 6.9750 as China’s National Bureau of Statistics (NBS) has reported a sense of deflation in the Consumer Price Index (CPI) (Feb) data. Monthly CPI figures have contracted by 0.5% while the street was anticipating a decline to 0.2% from the former release of 0.8%. The prices of goods and services in China have accelerated by 1% annually, lower than the consensus of 1.9% and the prior release of 2.1%.

Apart from that, the annual Producer Price Index (PPI) has contracted by 1.4% vs. the consensus of 1.3% contraction and 0.8% contraction in the prior release. This indicates that producers lowered the prices of goods and services at factory gates. The reason behind lowering prices could be sluggish demand. It seems that China’s reopening has failed to propel domestic demand.

A sense of deflation might force the People’s Bank of China (PBoC) and the Chinese administration to inject helicopter money into the economy to support the overall demand.

The US Dollar Index (DXY) is gathering strength as United States President Joe Biden has proposed an increase in corporation taxes from 21% to 28%. US Biden wants a 25% billionaire tax and large levies on rich investors. He has also proposed a tax on income over $400,000 at 39.6% in the budget.

More taxes on US individuals will be considered as contracting Fiscal policy, which might support the Federal Reserve (Fed) in bringing down the stubborn inflation.

Fed chair Jerome Powell has confirmed a higher terminal rate than previously anticipated as the battle against sticky inflation is getting complicated. Also, upbeat US Automatic Data Processing (ADP) Employment data has confirmed that January’s strong data on the labor market and consumer spending was not a one-time blip.