USD/CNY seen to decline towards 7.0 as US-China Washington talks likely to achieve a breakthrough, says Scotiabank

The USD/CNY currency pair is expected to decline towards 7.0 as the US-China Washington talks are likely to achieve a breakthrough, particularly if considering USD/CNH trading at a discount to USD/CNY recently, according to the latest research report from Scotiabank.

China’s factory price inflation slipped to -0.8 percent y/y in August from -0.3 percent a month ago amid ongoing trade disputes with the US, signaling a worsening economic growth. With PPI deflation expected to deepen further in the months ahead, it will prompt the Chinese authorities to launch more aggressive stimulus.

Although China’s CPI inflation remained flat at 2.8 percent y/y in August, it was largely due to surging pork price inflation. China's new yuan-denominated loans reached CNY1.21 trillion in August, CNY66.5 billion less than the same period last year.

Although newly-added total social financing rose CNY37.6 billion to CNY1.98 trillion in August from the same period last year, the GDP-adjusted credit impulse index suggests the nation’s credit supply growth has been losing momentum.

A 50 bp RRR cut set to take effect on September 16 may have paved the way for the central bank to reduce the 1-year MLF interest rate and the LPR next week. While CNY265.0 billion of MLF loans are scheduled to mature on September 17, the PBoC is due to reset the 1-year and 5-year loan prime rate (LPR) on September 20, the report added.

In addition, Fed Funds Futures are now pricing in a 22 bp rate cut by the US central bank at 2:00am HKT on September 19, providing scope for the PBoC to follow suit. China’s FX regulator, the State Administration of Foreign Exchange (SAFE), said in a statement on Tuesday afternoon that the nation decided to remove investment quota limit for QFII and RQFII.

The purposes may include 1) further opening up and developing domestic financial markets; 2) facilitating the renewed US-China trade talks; 3) attracting more portfolio inflows to offset China’s shrinking current account surplus or future current account deficit and; 5) boosting domestic stock markets ahead of the upcoming National Day holiday, Scotiabank further noted.