PBoC seeks to keep yuan exchange rate stable during renewed trade negotiations with the US, says Scotiabank

The People’s Bank of China (PBoC) is expected to keep the yuan exchange rate basically stable during the renewed trade negotiations with the United States and ahead of the weeklong National Day holiday, according to the latest research report from Scotiabank.

The PBoC on Friday announced a plan to auction a CNY10 billion of 182-day bills in Hong Kong on 26 September, with the aim of "improving the yuan bond yield curve" in the financial hub.

One day earlier, China’s Ministry of Finance is scheduled to sell CNY3.5 billion of additional 2021 bonds and CNY1.0 billion of additional 2024 bonds in the SAR. In addition, the PBoC continues setting USD/CNY fixing lower-than-expected.

Chinese trade negotiators suddenly cancelled a visit to two US farming states on Friday after wrapping up a two-day deputy-level trade talks in Washington. The cancellation came only about an hour after US President Donald Trump said he wasn’t interested in "a partial deal" with China based on Beijing increasing its purchases of US agricultural products.

The combination of Trump’s tough remarks and the cancellation stoked pessimism on the trade talks and casted a cloud over prospects for a trade deal, sending both US stocks and UST yields lower.

However, The New York Times on Saturday cited sources as saying that the trip was cancelled out of concern that it would turn into a media circus and give the misimpression that China was trying to meddle in American domestic politics, instead of any new difficulty in the trade talks, the report added.

The deputy-level meetings are aimed at laying the groundwork for high-level talks in early October. According to the newspaper, while the dates for the principal-level meetings have not been confirmed, they look likely to be scheduled for October 10-11.

On Sunday, China Business News reported citing Chinese vice agriculture minister Han Jun that a change in schedule for a Chinese delegation’s planned visit to US farm states has nothing to do with the trade talks, and America will extend the invitation in another arrangement.

Han added that China is willing to expand agriculture trade, cooperation with the US based on equality and mutual respect and that the two nations had sufficient and candid communication about agriculture area in just-finished ministerial level trade negotiations. The report has been reprinted widely by Chinese media, including China’s state-run Xinhua news agency and China Daily.

In addition, Xinhua news agency reported on Saturday that China and the US had "constructive" discussions on trade in Washington. The two countries agreed to keep communicating on related issues, and discussed the details of the next round of trade talks in October, according to Xinhua.

A separate statement from the US Trade Representative said that "These discussions were productive, and the United States looks forward to welcoming a delegation from China for principal-level meetings in October."

Separately, the New York Fed conducted an "overnight repo operation" for a fourth straight session on Friday, adding another USD75 billion to the short-term lending market. The New York branch of the Fed also said in a statement that it will continue repo operations through October 10, involving three 14-day operations involving USD30 billion as well as continued overnight operations of at least USD75 billion each.

The open market operations are expected to raise the reserve balances and weigh on the dollar in the medium- to-long-term finally, particularly if the Fed decides to re-expand its balance sheet later this year.

"We stay with our short USD/CNH position targeting 7.00, with expectations for the upcoming Washington talks to achieve a breakthrough," Scotiabank further commented.