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The USD/CNY and USD/CNH would trade towards 6.80 and then 6.70 should the US and China agree to resuming their bilateral trade negotiations in the third quarter of this year, according to the latest research report from Scotiabank.
Weak recent US macro data including the NFP job report have raised the odds of future Fed monetary easing, with Fed Funds Futures now pricing in a 26 bp rate cut at the July 30-31 FOMC meeting.
The Powell Put, the market’s insurance that the Fed will act to stimulate the markets if necessary, is expected to weigh on the DXY Index with falling 10Y UST yield, while improving risk sentiment in US stock markets and bringing a temporary relief to EM Asian currencies if the yuan is stable.
PBoC Governor Yi Gang said in an exclusive interview with Bloomberg on Friday that China has "tremendous" room to adjust monetary policy including interest rates and RRR if the trade war with the US deepens. Yi’s comments suggested further downside potential for the onshore yuan interest rates and China’s government bond yields, the report added.
Governor Yi Gang also told Bloomberg that no "numerical number" is more important than another when asked if there’s a red line for the yuan exchange rate. According to Governor Yi, the recent yuan weakness is attributable to "the tremendous pressure from the US side" amid simmering US-China trade tensions.
After former PBoC Governor Zhou Xiaochuan said on May 27 that the number 7 doesn’t mean much for the yuan exchange rate, we have seen increasing talks circulated in the onshore market in order to downplay the necessity of defending the 7 mark.
"We believe the PBoC’s stance and developments in the US-China trade talks will continue driving the yuan exchange rate in the foreseeable future. USD/CNY and USD/CNH are expected to remain relatively steady in the run-up to the G-20 Osaka Summit set for June 28-29, with China’s central bank keeping USD/CNY fixing below 6.9," Scotiabank further commented in the report.
