USD/CNH ignores downbeat China yields to flirt with 6.8950, PBOC vs. Fed divergence, US inflation eyed

• USD/CNH remains sidelined at one-week high, prods two-day winning streak of late.
• China 10-year Treasury bond yields drop the lowest since November amid dovish bias about PBOC, recession woes elsewhere.
• Mixed Fed talks, easing hawkish bets on FOMC’s May 0.25% rate hike weigh on US Dollar.
• US CPI, Fed Minutes eyed for fresh impulse; talks of China growth also important to observe.

USD/CNH portrays the market’s indecision around 6.8950, despite easing to 6.8930 during early Wednesday. In doing so, the offshore Chinese Yuan (CNH) pair signals the cautious mood ahead of the US Consumer Price Index (CPI) for March and the Minutes of the latest Federal Open Market Committee (FOMC) Monetary Policy Meeting.

It’s worth noting that the recently downbeat China Treasury bond yields and comments from the International Monetary Fund (IMF) jostle with the broad US Dollar weakness to challenge the USD/CNH bulls after keeping the reins in the last two consecutive days.

China’s headline 10-year Treasury bond yields drop to the lowest levels since November 2022, to 2.815% by the press time, as traders brace for further easing from the People’s Bank of China (PBOC), especially after the previous day’s downbeat inflation. That said, China’s headline inflation numbers for March, namely the Consumer Price Index (CPI) and Producer Price Index (PPI), came in 0.7% YoY and -2.5% YoY versus 1.0% and -1.4% respective priors.

However, the IMF’s optimism surrounding the dragon nation and receding hawkish bias about the Fed’s next moves cap the USD/CNH pair’s upside. That said, IMF's Asia-Pacific Chief Krishna Srinivasan said earlier in the day that China rebounded much faster than anticipated, per Bloomberg. On Tuesday, the IMF kept its growth estimations for China intact at 5.2% for 2023 and 4.5% for 2024.

Elsewhere, hopes of easy inflation in the US could be witnessed in the latest Fed talks as President and CEO of the Federal Reserve Bank of Minneapolis Neel Kashkari teases US Dollar bulls as he said, “2% inflation target should not be changed.”

Previously, Philadelphia Fed President Patrick Harker said that the Federal Reserve will continue to look closely at available data to determine what, if any, additional actions they may need to take. Before him, New York Fed President John Williams said that if inflation comes down, we will have to lower rates. Furthermore, Chicago Fed President Austan Goolsbee, said on Tuesday that they need to be cautious about raising interest rates after recent development in the banking sector.

It should be noted, however, that the US inflation expectations, as per the 10-year and 5-year breakeven inflation rates from the St. Louis Federal Reserve (FRED) data, remain firmer and challenge the USD/CNH bears.

Amid these plays, S&P 500 Futures remain directionless around 4,138 after a mixed Wall Street close. Further, the US Treasury bond yields grind higher and prod the US Dollar sellers. That said, the US 10-year and two-year Treasury bond yields grind higher around 3.43% and 4.03 during a four-day and five-day uptrend respectively.

Looking ahead, firmer prints of the US CPI and hawkish Fed Minutes are both required to defend the USD/CNH bulls.

Technical analysis

A one-month-old ascending triangle bearish chart formation restricts USD/CNH moves between 6.9150 and 6.8865.