Chinese yuan likely to remain supported or advance further vs CFETS basket of currencies ahead of US-China trade talks, says Scotiabank

The Chinese yuan is expected to remain supported or advance further versus a CFETS basket of currencies ahead of the 10th and 11th round of US-China trade talks, according to the latest research report by Scotiabank.

After the US and China agree to a trade deal, China will likely roll out new consumption spending incentives for cars and home appliances, along with tax cuts and fee reductions of a larger scale. Market sentiment will improve at that time with a stronger yuan, the report added.

Ning Jizhe, the head of National Bureau of Statistics of China and deputy chairman of the NDRC, said on the sidelines of the Belt & Road Forum in Beijing on Thursday that China’s economy has stabilized and shows upward momentum and that rising pork prices can be controlled.

Remarks from Dr Ning indicated that China’s April official manufacturing PMI due next Tuesday will likely rally further after rising to 50.5 in March. Dr Ning may also hint that rising pork prices won’t be able to limit the scope for the central bank’s further monetary easing.

In addition, PBoC Deputy Governor Liu Guoqiang said at a briefing in Beijing on Thursday that the central bank has not changed its monetary policy stance and has no intention to either tighten or loosen policy.

He added that the PBoC still aims to have "reasonable and ample" liquidity in money markets, and recent operations were aimed at adjusting short-term liquidity rather than signaling a change in stance. His comments may seek to alleviate concerns over tighter liquidity conditions in China’s onshore markets, likely to guide onshore yuan interest rates to lower levels.

Last but not least, US personal consumption expenditures (PCE) at constant prices slid at an annual rate of 0.6 percent q/q in the January-March period after rising 2.4 percent in the December quarter. It may suggest a slower-than-expected growth in US Q1 real GDP.

"As we know, the US economy is expected to grow an annualized 2.3 percent on quarter in the latest Bloomberg survey. Meanwhile, our economists see a 2.0 percent expansion. If we are right, a weaker-than-expected US real GDP growth will lead to a pullback in the DXY Index on Friday evening when the GDP data are released by the US Bureau of Economic Analysis (BEA). Otherwise, the DXY Index will extend its rally if US Q1 GDP growth comes in either stronger or much weaker than market consensus, according to the well-known dollar smile theory," Scotiabank added in its comments.