I have been studying the relation between exchange rates and the inflation of the currencies, but I am far from understanding the most relevant factor in driving FX market players from pricing currency pairs. I dowloaded US inflation percentages and data for the price of the USD/CNY currency pair. I have used this data to create the following plot:
If inflation is the rate at which the USD depreciates, why isn't the USD/CNY behaving in a more correlated manner in these data? An increase in USD/CNY implies more USD can be bought per unit of CNY, meaning the appreciation of the CNY with respect to the USD, i.e. the depreciation of the USD with respect to the CNY... But why is this value increasing in periods of decreasing inflation, such as the one preceding 1986? Is there any other factor missing in this picture? Maybe interest rates?