Ella 
In early trading on Tuesday, USD/CNH hit a yearly high of 7.3126 driven by the catalyst for China’s economic downturn, and was close to 7.2940 as of press time. In the meantime, the offshore yuan (CNH) also ignored the dollar’s pullback from monthly highs ahead of the release of US retail sales data. However, speeches by officials from the China Statistics Bureau and the People’s Bank of China defending the yuan through money market operations will test the USD/CNH bulls in the short term.
Early Tuesday, the People’s Bank of China (PBOC) cut the one-year medium-term lending facility (MLF) rate to 2.50% from 2.65% previously, and lowered the reverse repurchase rate to 1.8% from 1.9% previously.
Then it was announced that the total retail sales of consumer goods in China in July increased by 2.5% year-on-year, 4.8% expected, and 3.1% in the previous value; industrial production increased by 3.7% year-on-year, 4.5% expected, and 4.4% in the previous value.
But it is worth noting that in an interview with Reuters, Fu Linghui, a spokesman for the China National Bureau, defended the dollar/offshore yuan transaction, saying that there is no deflation in China, and that there will be no deflation in the future. But it is worth noting that the policymaker also acknowledged that the economic recovery faces challenges and expressed his expectation that the Chinese economy will maintain a smooth operation in the second half of the year.
On the other hand, the U.S. dollar index retreated from its highest level in five weeks, following gloomy inflation signals. That said, the New York Fed’s one-year inflation forecast fell to 3.5% in July, a drop of three percentage points and the lowest level since April 2021. However, the New York Fed survey also showed confidence in tight labor market conditions and an economic transition.
Notably, comments from US Treasury Secretary Janet Yellen seemed to favor the recent sentiment for USD/CNH bulls as she eased concerns about the US economy due to a possible slowdown in China . Nevertheless, U.S. Treasury Secretary Yellen still mentioned the risks and spillover effects of China’s economic slowdown, the Russian-Ukrainian war and climate change-related disasters on global economic development.
Against this backdrop, S&P 500 futures rose modestly, while U.S. 10-year Treasury yields traded near the highest level since November 2022 hit the previous day.
Next, the U.S. July retail sales rate is expected to be 0.4%, the previous value was 0.2%, which will be an important indicator to observe the direction of USD/CNH.
