The Chinese yuan extended its weakness against its US counterpart in the middle of the trading week, driven mostly by surprising lower consumer and producer price inflation. The yuan has come under pressure as of late because officials seem to be placing a cap on the currency’s tremendous rally. Is the yuan getting ready for a downward trend in 2021?

According to the National Bureau of Statistics (NBS), the consumer price index (CPI) fell 0.6% in November, coming in lower than the median estimate of -0.2%. Annual price inflation dropped 0.5%, down from the 0.5% gain in October. This was the first deflation reading in more than 11 years, led by declines in food prices (-2%), transportation (-3.9%), apparel (-0.3%), and rent, fuel, and utilities (-0.6%). Prices were higher for health care (1.5%), education (1%), and other goods and services (2.5%).

The producer price index (PPI) slid 1.5% year-over-year in November, compared to market forecasts of a 1.8% decline. This represented the tenth consecutive month of falling producer prices, with costs coming in lower for extraction (-3.6%), raw materials (-4.2%), and processing (-0.8%). Food production inflation did jump 0.1%).

Earlier this week, the trade surplus widened to $75.42 billion in November, with exports soaring 21.1% to $268.07 billion and imports rising 4.5% to $192.65 billion.

In other data, outstanding loan growth increased 12.8% year-over-year, the M2 money supply surged at a higher-than-expected rate of 10.7%. New yuan loans and total social financing both rose last month.

Financial markets are concentrating on the gain in foreign exchange reserves, which increased from $3.128 trillion in October to $3.178 trillion in November. This suggests that the People’s Bank of China (PBoC) is starting to put pressure on the yuan to prevent it from further appreciating. The yuan has rallied more than 6% against the greenback, buoyed by China’s strengthening economic recovery.

The USD/CNY currency pair rose 0.15% to 6.5433, from an opening of 6.5332, at 18:11 GMT on Wednesday. The EUR/CNY slipped 0.13% to 7.8968, from an opening of 7.9088.