China’s Consumer Price Index (CPI) rose 0.5% year on year in July, coming in below the 0.8% forecast. The release points to a softer pace of consumer price growth than markets had anticipated.
FXStreet attributed the report to its in-house editorial team of economic journalists and foreign exchange specialists, which oversees content for the outlet and describes its coverage as taking a journalistic approach to the forex market.
Deflationary Fears and Policy Expectations
With China’s July consumer price index coming in at a weak 0.5% against the expected 0.8%, deflationary worries are gripping the market once again. We believe this miss signals a deeper slowdown in domestic demand that will force aggressive policy intervention in the coming weeks. For derivative traders, this underwhelming economic data creates a prime environment to position for further monetary easing by Beijing.
We expect the People’s Bank of China to cut interest rates soon, which will likely put heavy downward pressure on the Yuan. Traders should consider buying USD/CNH call options or entering long futures positions to capitalize on a weaker currency. Historically, when Chinese inflation misses expectations by this margin, the Yuan tends to depreciate quickly as capital seeks higher yields elsewhere.
Investment Implications Across Markets
Lower inflation and expected rate cuts mean Chinese government bond yields are headed even lower. We recommend going long on 10-year Chinese government bond futures to ride this yield decline. Recent trading data shows that Chinese 10-year yields have already hovered near historic lows of 2.1%, and this latest economic disappointment will likely drag them down further.
Weak consumer demand in the world’s second-largest economy is also bad news for global commodities. We suggest buying put options on copper and iron ore futures, as industrial demand is bound to soften alongside consumer spending. Industrial metals are highly sensitive to Chinese economic surprises, and a lack of domestic demand will limit any near-term price rebounds.
Lastly, Chinese equity indices will likely face short-term volatility, making FTSE China A50 index futures vulnerable to further downside. We advise using bear put spreads on the Hang Seng Index to protect existing portfolios from sudden sell-offs. Until we see a massive fiscal stimulus package from Beijing, the path of least resistance for Chinese equities remains skewed to the downside.
