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PBoC likely to start preparing for potential appreciation in the yuan following downward pressure on USD/CNY this month, says Scotiabank

The People’s Bank of China (PBoC) is expected to start preparing for potential appreciation in the yuan, following emerging downward pressure on the USD/CNY that has prompted the central bank to set the pair slightly higher than market expectations this month, according to the latest research report from Scotiabank.

Chinese Vice Premier Liu He spoke to US Trade Representative Robert Lighthizer and US Treasury Secretary Steven Mnuchin over the phone on Friday night. Both sides said they are making good progress on the "phase-one" trade deal they hope to sign next month, with some sections now close to being finalized, according to the Hong Kong-based SCMP newspaper.

The latest primary-level phone call could take optimism for reaching a partial US-China trade deal to the next level, improving risk appetite further along with more Fed monetary easing. US consumer sentiment declined to 95.5 in October, coming in below the prior reading and market estimate of 96.0 and raising concerns over a slowdown in the US economic growth, the report added.

In addition, SAFE spokeswoman Wang Chunying reiterated at a press conference in Beijing on Friday (25 October) afternoon that China will stick to its "floating exchange rate system with adjustments and management" and "keep the yuan exchange rate basically stable at a reasonable and equilibrium level," when being asked about a currency clause as part of the phase-one trade deal.

It was reported by Reuters on October 25 that "the Chinese want to get back to tariffs on just the original USD250 billion in goods."

"In our view, it may need the dollar/yuan to fall below 6.90 that is the level seen right before 1 August when US President Donald Trump announced a 10 percent additional tariffs to be imposed on another USD300 billion of Chinese goods with effect from September 1," Scotiabank further commented in the report.

While USD/CNY spot have closed below the same day’s fixing in the past several sessions, the options market is shifting towards less bearish on the yuan with decreasing premium for protection against the yuan weakness.

US President Donald Trump told reporters on Monday that "We are looking probably to be ahead of schedule to sign a very big portion of the China deal, we’ll call it Phase One but it’s a very big portion."

By Debarati Bir
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