USD/CNH heavy near 7.12, eyes 7.10 support - BBH

The Chinese Yuan (CNH) is testing key support as mixed August inflation data highlights China's struggle with deflation. Analysts see scope for gradual currency appreciation to boost household spending and support growth, BBH FX analysts report.

China CPI dips to -0.4% y/y, core inflation at 18-month high

"USD/CNH is trading heavy near 7.1200 with the next support offered at 7.1000. China's August CPI was mixed. Headline CPI eased to a six-month low at -0.4% y/y (consensus: -0.2%) vs. 0% in July reflecting the decline in food prices. Core CPI rose to an 18-month high at 0.9% y/y vs. 0.8% in July. PPI matched consensus at -2.9% y/y vs. -3.6% in July but still suggests that deflationary pressure remains high."

"China's economy is struggling to escape a deflationary spiral in large part because consumption spending is too weak. In our view, a gradual revaluation of China's currency could help China stimulate consumer spending by boosting disposable income through cheaper imports. Bottom line: USD/CNH has room to break lower."