|   Commentary


  |   Commentary


Yuan exchange rate likely to be defended by Chinese regulators as long as trade talks continue, says Scotiabank

The yuan exchange rate is expected to be defended by the Chinese regulators as long as the trade talks continue, according to the latest research report from Scotiabank.

Foreign investors have been pouring funds into mainland China’s equity markets since late August when the US and China started to extend an olive branch to each other. Month-to-date, they have purchased a net USD6.44 billion of mainland Chinese stocks.

In addition, FTSE Russell announced on August 24 that it would raise the inclusion factor of more than 1,000 A shares in its global benchmarks from 5 percent to 15 percent and include 87 new A-share constituents, effective on September 23.

On the same day, S&P Dow Jones Indices is due to include A shares in its global benchmarks with a 25 percent inclusion factor. The inclusions are expected to bring a total of USD5.1 billion in passive incremental funds to A shares.

White House economic adviser Larry Kudlow said on Thursday that he sees a "little softening" in mood as trade deputies from both nations meet. Earlier on Wednesday, Kudlow said that US-China trade deputies are meeting Thursday and Friday in Washington and trade principals from the two countries will be meeting in mid-October to continue talks.

According to Reuters, the discussions at the two-day deputy-level meetings are likely to focus heavily on agriculture, including US demands that China substantially increase purchases of American soybeans and other farm commodities.

When approaching the weeklong National Day holiday and the 13th round of US-China trade talks due in early October, the yuan is facing some renewed depreciation pressure. Onshore USD/CNY has been closing well above the same day’s fixing in the past sessions.

In the meantime, the PBoC keeps setting USD/CNY fixing lower than expected to defend the yuan exchange rate and create positive conditions for the renewed trade negotiations.

US Treasury Secretary Steven Mnuchin has said that currency issues will be a focus of the new rounds of talks. The New York Fed injected USD75 billion in overnight cash into the US money market, with the auction oversubscribed for the second straight day.

It will conduct an "overnight repo operation" for a fourth straight session on Friday, adding another USD75 billion to the short-term lending market. The open market operations are expected to raise the reserve balances and weigh on the dollar in the medium term finally, particularly if the Fed decides to re-expand its balance sheet later this year.

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