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The PBoC set yuan parity a bit stronger this morning than at Tuesday, at 7.0703. That’s the highest against the US dollar since May 6.

By 7pm HK time, the CNY stood at 7.0616, the offshore CNH was quoted at 7.0565. Both are at their strongest since April 14.

The central bank may have been anticipating the deeper than expected drop into deflation of May producer prices (PPI), which came in at -3.7% according to the National Bureau of Statistics, compared to analysts’ average forecasts of -3.3%. The April number was -3.1%, following -1.5% in March.

The sharp descent into deflation over the past three months puts significant upward pressure on the Chinese currency, which was recently briefly obscured by US President Donald Trump’s threats to ban US government funds from investing in Chinese securities.

It also could prove a strong hindrance to economic recovery as profits are curtailed and investments halted or postponed.

While the PBoC has supported credit expansion over the past several months by government bond issuance and the stock of outstanding credit expanded by 12.5% in May, faster than in April, I believe that the PBoC will conclude that more monetary stimulus measures are required to contain deflation and will launch such measures in the very near future.

This is underlined by the disinflationary trend in consumer prices (CPI), which rose 2.4% in May from a year earlier, following a 3.3% gain in April and 4.3% in March. The May number is the lowest in 14 months.

Upward pressure from deflation and capital inflows will be counterbalanced by monetary easing and leaves me comfortable with the three-month forecast of 7.05 – 7.10 yuan per US dollar.

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This story appeared first on Asia Times Financial