Over the weekend, Chinese inflation figures were published and showed a slight surprise on the upside. In this case, however, this should be seen as positive – because while the rest of the world is struggling with inflation that tends to be too high, China is still on the brink of deflation. Consumer price inflation surprised on the upside at 0.2% year-on-year, compared with a 0.1% decline expected according to a Bloomberg survey. However, a 0.2% year-on-year price increase is more in line with what other economies normally experience on a monthly basis, Commerzbank's FX analyst Volkmar Baur notes.

USD/CNY to be at 7.0 at the end of next year

"Inflation in China therefore remains structurally lower than in other countries, particularly the US and the eurozone. And because this has been the case for years and is likely to remain so, it supports the currency because Chinese goods (and services) are becoming increasingly cheaper compared to their US and European counterparts. For this reason, the real exchange rate also indicates that the renminbi is significantly undervalued from this perspective, which supports Chinese exports."

"This does not mean that we expect a strong appreciation of the CNY in the coming months. After all, USD/CNY is still politically controlled by the PBoC, and a relatively weak CNY is currently in the interest of the Chinese government. However, it paves the way for the CNY to appreciate slightly in nominal terms (we expect USD/CNY to be at 7.0 at the end of next year, down from 7.1 today) without the real exchange rate appreciating."

"This means that export goods remain competitive in terms of price, while at the same time it becomes more attractive to hold the CNY because it is appreciating nominally against the USD. This should help the Chinese government achieve another goal: the increasing internationalization of the renminbi."