Chinese Yuan Headed for Third Straight Monthly Gains Driven by Stronger Data

The Chinese yuan is set to end the third straight month stronger in July, reversing almost a quarter of the central bank intervention-aided decline in the past three months, helped by stronger trade and growth numbers over June and July and increased price pressures.

The yuan's return to the appreciating path will likely help the world's second largest economy to see more capital inflows in the rest of 2014, said Guan Tao, the head of the department of international payments at the State Administration of Foreign Exchange (SAFE), on 23 July.

Tao also said at a news conference that China's rising foreign exchange reserves could stoke long-term inflationary pressures, according to Reuters.

The 10 June data showed that China's consumer price inflation accelerated to 2.5% in May from a year earlier versus the 1.8% rise in the previous month and beating the market forecast of 2.4%.

The CPI inflation slowed in June, but at 2.3% the decline was only marginal.

The yuan that weakened around 3% to an 18-month low of 6.2540 against the US dollar has strengthened nearly 0.85% since then to the 23 July low of 6.2014.

According to the 10 July data, China's trade surplus is at $31.60bn, slightly below the May reading of $35.92bn, but very well keeping the trend upward since reversing it from a deficit of $22.98bn in February.

With the government committed to keep the GDP growth rate near its target rate of 7.5% and the trade scenario doing good, the Chinese currency is likely to keep the upward trend.

China's second quarter GDP growth accelerated to the government target rate of 7.5%, topping market expectations of 7.4%, data showed on 16 July, a day after Fed Chair Janet Yellen sounded confident of the US jobs and economic growth.

Yellen's remarks had strengthened the greenback across the board.

The broad dollar rally may have prevented sharper gains in the yuan too but it failed to weaken the Chinese unit as one major element behind its steep losses in the previous three months - buying of dollars by the PBoC - has been absent of late.

Another release on 16 July showed that the June industrial output growth at 9.2% from 8.8% in May, topping the consensus of 9.0%.

Chinese authorities have been keeping its sector-specific stimulatory measures so that the GDP growth has not fallen off significantly from the official target rate of 7.5%.

China had increased spending in railways, cut taxes and reduced banks' reserve requirements in order to increase credit availability for some sectors, and the Q2 data showed that the measures have been productive.

Chinese Premier Li Keqiang said on 17 July that economic growth of slightly more or less than 7.5% this year would be acceptable as long as it still led to new jobs and higher wages.

The Chinese data left in this month is the July purchasing managers' index for manufacturing by HSBC, due on 24 July. The market forecast is for a rise to 51.0 from 50.7 in the previous month.

Technical Outlook

The USD/CNY pair has broken below the 23.6% Fibonacci retracement of the February-April rally and the next target will be the 38.2% level of 6.1800.

The next levels on the downside are 6.1533 the 50% point and then the 6.1230-1185 area, ahead of a retest of the 13 January low of 6.0407, a record high for the yuan.

On the higher side, the 23.6% level of 6.2140, is seen as first level and then 6.2290 ahead of a repeat of the 30 April high of 6.2672.