Monday’s CNH reaction to GDP (USD/CNH rose back to 7.1800, after lows last Friday of 7.1230), despite positive surprises in June industrial production, suggests that the recent squeeze lower in USD/CNH is now over. 

We acknowledge that the recent pullback in USD makes our Q3 USD/CNH target of 7.50 more difficult to achieve. PBoC suppression of CNY and CNH volatility ahead of key levels (such as 7.30) also mean that our target may take longer than initially expected.

However, the fundamentals in our view still point to higher USD/CNH. The continued string of weak China data, most notably Q2 GDP, re-affirm the narrative of Fed-PBoC divergence and yuan weakness. As such, even though we did not expect USD/CNH to trade below 7.20 last week, we still view the pair as a buy on dips below this level.