USD/CNH stays on the way to refresh record high even as China banks, PBoC defend Yuan

• USD/CNH remains sidelined after refreshing nine-month high, braces for all-time peak amid firmer US Dollar, risk aversion.
• US Dollar cheers hawkish Fed concerns, mostly upbeat US data to favor Yuan sellers.
• PBOC’s defense of currency, economic fears about China propel prices toward the record high marked in 2022.
• Risk catalysts eyed for clear directions amid light calendar.

USD/CNH remains on the front foot as bulls flirt with 7.3400 after refreshing the yearly high early Thursday. In doing so, the offshore Chinese Yuan (CNY) not only justifies the US Dollar’s strength but also the downbeat concerns about China and the People’s Bank of China’s (PBoC) struggle to defend the domestic currency.

PBoC has been trying to tame the onshore Chinese Yuan (CNY) fix for many days, as perceived by the wide gap between the daily closing of the USD/CNY and the daily fix. Recently, the PBoC set the USD/CNY central rate at 7.2076 , versus the previous fix of 7.1986 and market expectations of 7.3047. It's worth noting that the USD/CNY closed near 7.2990 the previous day. On the same line are the latest talks that some state banks from Beijing are actively selling the US Dollar to defend the Yuan.

On the other hand, a slump in China’s housing prices marked the first fall of the year in June and joins the fears about another bond market crisis in the Dragon Nation, as the biggest private realtor Country Garden struggles to pay bond payments, to propel the USD/CNH price.

It should be observed that the Chinese policymakers have been trying by all means to defy the concerns about easing economic recovery but no meaningful market reaction has been witnessed of late, which in turn flags concerns about the recession of the world’s second-largest economy and fuels the USD/CNH.

Elsewhere, the latest Fed meeting minutes highlighted the policymakers’ discussion on the inflation pressure, despite marking a division on the rate hike decision. That said, the Minutes also conveyed that most policymakers preferred supporting the battle again the ‘sticky’ inflation.

Furthermore, the recently firmer US data also and fears of global economic consolidation also underpin the USD/CNH run-up.

The latest Fed meeting minutes highlighted the policymakers’ discussion on the inflation pressure, despite marking a division on the rate hike decision. That said, the Minutes also conveyed that most policymakers preferred supporting the battle again the ‘sticky’ inflation.

On Wednesday, the US Industrial Production marked a surprise 1.0% growth for July versus 0.3% expected and -0.8% prior while the Capacity Utilization for the said month also improved to 79.3% from 78.6%, compared to market forecasts of 79.1%. Further, the Building Permits edged higher to 1.442M for July from 1.441M whereas the Housing Starts rose to 1.452M for the said month versus 1.398M prior and 1.448M expected. It’s worth noting that both the Building Permits Change and Housing Starts Change improved more than market forecasts and previous readings.

It’s worth mentioning that the global rating agency Fitch Ratings lowered medium-term Gross Domestic Product (GDP) projections for 10 developed economies in its quarterly Global Economic Outlook.

While portraying the mood, Wall Street closed in the red while the US 10-year Treasury bond yields refreshed the yearly top to 4.278%. It should be noted that S&P500 Futures dropped to the lowest level in seven weeks by the press time and keep the USD/CNH bulls hopeful of witnessing further upside.

Technical analysis

An ascending resistance line from late December 2022, close to 7.3530 at the latest, joins the overbought RSI (14) line to prod the USD/CNH bulls. The pullback moves, however, remain elusive unless breaking June’s peak of around 7.2860.