At first glance, the inflation data from China published this morning suggests that deflationary pressure appears to be easing. At least consumer prices rose at an annual rate of 0.7%, which is significantly faster than recently (0.2% in October). However, a closer look at the details raises doubts again, Commerzbank's FX analyst Volkmar Baur notes.

PBoC guides CNY stronger as real exchange rate faces downward pressure

"The monthly rate was again negative at -0.1%, for the first time since June, even though food prices rose by 0.5% due to a significant increase in the fresh fruits subcategory (+7.2% month-on-month). Prices for services actually fell by 0.4% month-on-month. The rise in the annual rate is therefore much more attributable to a base effect from last year than to increased inflationary momentum – apart from fruit, that is. And there are still no signs of a trend reversal in producer prices either."

"Inflation in China is likely to remain lower than in Europe or the US for the foreseeable future, leading to constant downward pressure on the real exchange rate of the CNY. This should normally be offset by a nominal appreciation of the CNY, which would lead to a lower USD/CNY exchange rate."

"The PBoC also seems to be taking this to heart at the moment. In recent months, the exchange rate set daily by the central bank against the USD has been continuously lowered, which means a stronger CNY. And we believe that this trend is likely to continue."