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Fundamentals

China's CPI in June dropped from 0.2% year-on-year growth in May to 0%, lower than the same period last year. At the same time, it is also the lowest level since February 2021. The market's concern about the spiraling deflation in China has reached a "warning level".

In addition, the producer price index (PPI) continued to deteriorate and entered the contraction range, down -5.4% year-on-year. The growth rate is higher than the 4.6% decline in May and lower than the expected -5.0% decline. This is the ninth consecutive month that the PPI has entered a state of deflation, and it is also the biggest decline since December 2015.

Market observation: Looking ahead, although the NPC and CPPCC clearly decided to give priority to "restoring and expanding consumption", with the opening of the economy in the second half of the year, efforts to boost the economy and curb deflation have not been effective, and China policymakers have little time to reverse the sharp deterioration of the internal demand environment. If the deflationary spiral continues, it may lead to further loss of consumer and business confidence, which may lead to China falling into a liquidity trap. The role of monetary policy tools in stimulating real economic growth will be further weakened.

We believe that inflation may rise gradually later this year, but the upside is limited, leaving room for further easing. Due to weak credit demand and pressure on monetary policy, most of the support will be provided through fiscal policy, and the policy interest rate will continue to be lowered.

Last Friday, July 7, the U.S. Dollar Index (USDX) fell below the 50-day SMA, which has been the previous small support level since June 28, 2023, and after the release of the U.S. non-farm payroll data, technical factors intensified the selling of the USD.

According to the rolling performance of the market up to today, the USDEUR (-1.89%), USDGBP (1.81%), and USDCHF (-1.35%) are the weakest, while the USDCNH (+1.44) remains stable.

In addition, the premium of the 2-year yield of US Treasury Securities relative to the average 2-year sovereign yield of major developed countries (Germany, Britain, Japan, Canada, Switzerland, Australia, and China) has also narrowed.

Technical Analysis

Since May 4, 2023, the USDCNH has accelerated upward along the 20-day SMA. At present, the bulls have successfully rebounded by relying on the 89 and 100 SMA in the 4H timeframe. If the current key intermediate support level of 7.2160 is not broken, it is expected that the USDCNH will continue to maintain a short-term bullish trend. This may push the CSI 300 and the SSE 50 Index to weaken further. It is recommended to buy the dips.

Trading Recommendations

Trading direction: Long

Entry price: 7.2350

Target price: 7.3240

Stop loss: 7.1660

Deadline: 2023-07-24 23:55:00

Support: 7.2178, 7.2062, 7.1666

Resistance: 7.2759, 7.2857, 7.2913