USD/CNH: 50% of Oct-Mar drop erased, eyes China inflation data

• USD/CNH has retraced close to 50 % of the sell-off from October 2018 high of 6.98.
• Lingering US-China trade tensions favor further upside in USD/CNH.
• A below-forecast China PPI figure may revive deflation fears.

USD/CNH has erased nearly half of the sell-off from the Oct 2018 high of 6.98 to March 2019 low of 6.6699. The currency pair is currently trading at 6.8129, having nearly tested 6.8250 (50% Fib retracement of 6.98/6.6699) on Monday.

The pair had gapped higher on the first trading day of the week, courtesy of re-escalation of US-China trade tensions by Trump.

Early Sunday, President Trump tweeted that he would raise tariffs on Chinese goods to 25% from the current 10% on Friday, catching markets off guard. On Wednesday, a notice in the Federal Register formally laid the groundwork to raise tariffs early Friday. With trade tensions set to dominate the proceedings, the path of least resistance for USD/CNH appears to be on the higher side.

The bullish case for a break above the 50% Fib level of 6.8250 would further strengthen if China's inflation figures, due at 01:30 GMT, show a drop in the factory-gate prices (producer price inflation) and an uptick in the consumer price inflation.

While the PPI deceleration would add to concerns about the return of deflation, an above-forecast CPI would force the Chinese central bank to stand pat.

Technical Levels