USD/CNH Hits Fresh Multi-Week High Amid Rising Yields, China's Inflation Data In Focus

• A combination of supporting factors lifts USD/CNH pair to an eight-week high on Thursday
• Strong U.S. trade balance figures outweigh weak Chinese trade balance figures helping exert upward pressure on USD/CNH pair
• Markets await the release of China's inflation data set on Friday, which expected to show surging inflation in China

The USD/CNH cross caught fresh bids on Thursday and climbed to an eight-week high, around 7.15242 - 7.15291 region, during the second half of the Asian session. The pair looks set to maintain its bid tone heading into the European session. A combination of factors continues to weigh heavily on the Yuan, which along with rising treasury bond yields, act as a tailwind for the USD/CNH pair. Apart from this, the risk-off market mood continues to support the greenback and turns out to be a key factor acting as a headwind for the risk-sensitive Yuan. Additionally, a generally weaker tone around the equity markets supports the buck and helps exert upward pressure on the USD/CNH pair.

Further contributing to the sentiment around the USD/CNH pair was the fresh round of disappointing Chinese macro data which further added worries about a global economic downturn. A Wednesday's Chinese General Administration of Customs report showed China's trade surplus dropped to USD 65.81 billion in May 2023 from USD 78.40 billion in the same period a year earlier and below market forecasts of USD 92 billion. It was the smallest trade surplus since February, as exports fell more than imports amid persistently weak global demand. Exports shrank by 7.5% yoy to a three-month low of USD 283.5 billion, while imports decreased by 4.5% amid weakening domestic demand.

The weak Chinese trade balance figures come days after a slew of softer Chinese macroeconomic readings earlier last month showed the world's second-largest economy's post-Covid rebound had stalled, adding to worries about a global economic downturn. The country is grappling with a fresh surge of Covid-19 cases that has raised market concerns about additional disruptions to economic activities. Market risk sentiment remains fragile amid the ongoing tussle between Washington and Beijing concerning the former's relations with Taiwan and the US-China chip wars.

That said, further undermining the Offshore Yuan was the fresh round of positive U.S. macro data on Wednesday, which showed the U.S. trade deficit widened by the most in eight months as goods' imports rebounded while energy product exports declined. The U.S. Department of Commerce reported the U.S. trade deficit in goods widened to USD 96.8 billion in April of 2023 from the upwardly revised USD 84.6 billion in the previous month, compared to market expectations of a USD 85.7 billion gap, an advance estimate showed. Exports fell by 5.5% from the last month to USD 163.3 billion, while imports rose by 1.8% to USD 260 billion.

The upbeat U.S. trade balance report comes days after a U.S. Bureau of Labor Statistics report on Friday showed job numbers smashed expectations, pointing to the likelihood that the Fed is less likely to halt its aggressive tightening campaign anytime soon. These upbeat job numbers, combined with hotter-than-expected US PCE figures released in early May, remain supportive of the greenback and have reinforced a hawkish Fed outlook in June. Fed fund futures traders are now pricing in a roughly 34% chance that the U.S. central bank will raise rates by 25bps next week, compared to a 26.4% chance a week ago, according to CME's Fedwatch Tool, after weak U.S. services data and mixed Fed talk. 

As we advance, investors look forward to the U.S. docket featuring the release of the Fed's Balance Sheet later today during the late north-American session. However, the focus remains on China's inflation data, set for release on Friday and is expected to show sticky inflation in China.

Technical Outlook: Four-Hours USD/CNH Price Chart

From a technical perspective, the USD/CNH price has extended the modest rebound from the demand zone ranging from 7.14437 - 7.14268 levels, of which a further increase in buying pressure from the current price level would uplift spot prices toward confronting the 7.16749 resistance level. Buying interest could gain momentum if the price pierces this barrier, creating the right conditions for an advance toward the 7.17000 ceilings. All the technical oscillators (RSI (14) and MACD) on the chart are in positive territory, suggesting continuing the bullish price action this week.

If dip-sellers and tactical traders jump back in and trigger a bearish reversal, the price will find support at the demand zone. A subsequent break below this zone would pave the way for a drop toward tagging the 20-day (blue) EMA at the 7.13053 level. A four-hour candlestick close below this level could see the USD/CNH accelerate its decline toward retesting the lower limit of a short-term ascending channel. A subsequent break below this support level would pave the way for further declines toward the demand zone ranging from 7.10935 - 7.10681 levels.