AUD/USD falls as China reports lowest inflation since Feb 2021

Key points

The Australian Dollar, a liquid proxy for China’s Yuan, retreated more than 0.5% against its US counterpart on Monday, after data showed China’s consumer prices had surprisingly flattened in June.

China’s annual CPI inflation was reported at 0% in June, slowing down from 0.2% in May. It has been the lowest figure since a deflation in February 2021, mostly because of a drop in non-food prices and cost of transport.

Annual core CPI inflation, which excludes volatile categories such as food and energy prices, was reported at 0.4% in June, or the lowest since March 2021.

Meanwhile, producer prices decreased 5.4% year-on-year in June, a ninth consecutive month of producer deflation and also the steepest drop since December 2015.

“The softer CPI is still reflecting weak domestic demand while PPI deflation underscores the strains on factories,” OCBC currency strategist Christopher Wong was quoted as saying by Reuters.

“(It’s) basically saying that China needs stimulus support.”

Last Friday the Aussie gained 1% against the US Dollar on the back of smaller-than-expected US Non-Farm Payrolls growth in June.

The US economy created 209,000 job positions in June, after a revised down 306,000 growth in May, while falling short of market consensus of 225,000.

Yet, the jobs data miss did not affect Fed rate hike expectations.

As of 9:23 GMT on Monday AUD/USD was losing 0.75% to trade at 0.6641. Last Friday the major Forex pair went up as high as 0.6701. The latter has been the pair’s strongest level since July 4th (0.6705).

Bond Yield Spread

The spread between 2-year Australian and 2-year US bond yields, which reflects the flow of funds in a short term, equaled -55.2 basis points as of 8:15 GMT on Monday, down from -52.6 basis points on July 7th.