Chinese yuan likely to advance further in the coming week, says Scotiabank

The Chinese yuan is expected to advance further in the coming weeks, by considering 1) the Fed’s dovish stance and China’s future stimulus measures; 2) the phase-one trade deal due to be signed on January 15 and; 3) a de-escalation of US-Iran tensions, according to the latest research report from Scotiabank.

China’s CPI inflation came in unchanged at 4.5 percent y/y in December, compared to market estimate of 4.7 percent. The softer-than-expected print seems to provide scope for the PBoC to deliver more monetary easing measures this year.

China is expected to implement more stimulus steps in addition to the 50 bp RRR cut effective from January 6 to further boost credit supply and revive economic growth, the report added.

Hovering expectations for further reductions in the rate of the 7-day reverse repos, 1-year MLF and 1-year LPR would anchor and pull down the front-end CNY IRS/NDIRS, while steepening the curves in the run-up to the Chinese New Year (January 25).

Meanwhile, the nation’s factory deflation eased further to 0.5 percent y/y in December along with growing factory activity, showing early signs of an economic recovery. China’s official manufacturing PMI stayed above the 50 threshold for the second straight month in December.

China’s commerce ministry announced on Thursday afternoon that Chinese Vice Premier Liu He will visit Washington D.C. on January 13-15 to sign the phase-one trade deal with the US. Hours later, US President Trump said at the White House that the negotiations for the second round of a US-China trade deal will start "right away," but might not be finished until after the election. It suggests a US-China trade truce could last till the 2020 US presidential election set for 3 November.

"We maintain our short USD/CNH position with a new target of 6.80 a trailing stop of 7.00, after the pair fell below the initial target of 6.95," Scotiabank further commented in the report.