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PBoC likely to keep USD/CNY fixing below 6.9 in run-up to G-20 Osaka Summit, says Scotiabank

The People’s Bank of China (PBoC) is expected to keep the USD?CNY currency pair fixing below 6.9 in the run-up to the G-20 Osaka Summit set for June 28-29, according to the latest research report from Scotiabank.

Further, the pair is seen to  trade towards 6.80 and then 6.70 should the US and China agree to resuming their bilateral trade negotiations in the third quarter. US retail sales increased a seasonally adjusted 0.5 percent in May from a month earlier, with April’s data revised up to 0.3 percent from -0.2 percent.

Meanwhile, the nation’s industrial production rebounded in May, with a seasonally adjusted mom rise of 0.4 percent. On an annual basis, however, US retail sales growth slowed to 3.2 percent y/y last month from 3.7 percent y/y in April, indicating a slowdown in US GDP growth in the second quarter.

According to CME FedWatch Tool, Fed Funds Futures are now pricing in a 5 bp and 26 bp rate cut respectively at the June and July FOMC meeting. If the Fed surprises the market with a pre-emptive rate cut this week, it will definitely boost risk sentiment and undermine the dollar broadly, providing insurance against an unfavorable outcome of the possible Trump-Xi Summit in late June, the report added.

However, if the Fed stands pat on its benchmark interest rates this week and if the decision is followed by a US-China trade talk breakdown, the US central bank will be forced to deliver a reactive rate cut next month in response to escalating risk aversion and surging volatility across the markets.

China’s latest data showed its factory output and fixed-asset investment both expanded at a slower-than-expected pace in May, in line with weak credit and money supply growth reported earlier.

Former PBoC Governor Zhou Xiaochuan warned at the annual Lujiazui Forum on Friday that the yuan may face pressure if China suffers from export loss and trade wars may once again trigger competitive devaluation in multiple countries around the world. He worried that the consensus reached in the past to prevent competitive devaluation may be challenged.

"On the other side, latest comments from PBoC Governor Yi Gang and former PBoC Governor Zhou Xiaochuan suggest that USD/CNY could rally through the 7 psychological level if needed due to a US-China trade talk breakdown, with USD/CNH trading at a premium to the onshore pair. Tumbling CNY or CNH could dent market sentiment and undermine the INR, IDR, KRW, PHP and SGD markedly, according to our simple correlation analysis," Scotiabank added in its comments.

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July 2 15:00 UTC Released

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449.6 Stale

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