USD|CNH – red dragon on the way to deflation?

The Chinese National Bureau of Statistics (NBA) published the latest consumer price data for mainland China this morning. Consumer prices fell by 0.1 percent over the last 12 months. Wholesale prices in particular fell for the 27th month in a row, and there is no inflation in producer prices - on the contrary, they fell by 2.3 percent over the last 12 months. The red dragon therefore has more than just a slight problem. The exchange rate of the renminbi to the greenback speaks volumes.

Deflation is a sustained decline in the general price level of goods and services in an economy over a period of time. This means that money gains purchasing power because you can buy more for the same amount.

On the one hand, the causes of deflation can be explained by a decline in demand. Lower consumption of goods and lower investments lead to companies adjusting their prices downwards. On the other hand, an oversupply of goods and services with constant or even falling demand can be responsible for deflation.

In terms of monetary policy, a reduced money supply in circulation can be the cause of deflation. In the present case, this would be negative. 

Now to the topic of "technology" and thus also the topic of "AI". Increases in efficiency, savings, increases in productivity, reductions in production costs can on the one hand help to increase companies' profits, and on the other hand also help to reduce prices if companies pass on at least some of the lower costs to consumers.

Deflation may be "nice" for consumers and their wallets for a while, but if it leads to lower profits overall, this will inevitably lead to further negative implications, such as falling investments, job losses, and consumers could trigger a deflationary spiral. The latter is due to expectations of further falling prices and thus a reduction in consumption of goods that are not part of everyday life. People postpone purchases for the foreseeable future in the expectation of even lower prices soon. 

Deflation is therefore a danger to an economy that should not be underestimated, just like inflation. Long-term deflationary movements lead to higher unemployment and a recession.

The analysis of the currency pair USD/CNH ( offshore yuan ) is carried out here in the daily chart. In order to be able to derive the next targets for the bulls and bears in more detail, a Fibonacci analysis would be necessary. The respective Fibonacci retracements and Fibonacci projections, which can be generated using the web-based trading platform " ActivTrader ", would then be used to determine the targets for the top and bottom.

Based on the last intermediate high of July 3, 2024 of 7.3106 to the low of September 26, 2024 of 6.9704, the next resistances would be at the projections to the top of 7.3909 (1.236%), 7.4406 (1.382%) and 7.5208 (1.618%). The supports would be at the marks to the bottom of 7.3106 (1.00%), 7.2303 (0.764%), 7.1806 (0.618%), 7.1405 (0.50%), 7.1004 (0.382%), 7.0507 (0.236%) and 6.9704 (0.00%). The three EMAs ( EMA50 in purple color, EMA100 in blue color and EMA200 in red color ) have been added to the chart .

A target area on the top would be in the area of ​​the 1.618 percent Fibonacci projection of 7.5208. On the bottom, the target area would be the 0.764 percent Fibonacci retracement of 7.2303. All three EMAs are currently moving around this mark. The two rectangles ( in green and red ) are intended to help visualize the respective bull and bear price target areas more closely. At the time of this analysis, the Relative Strength Index still showed a neutral market condition on a daily basis at 66.79 points.

Source: ActivTrader

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