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The EUR is expected to advance against the USD this year, while an increase in the EUR’s weighting could lead to a bigger rise in the CNY to ensure a steady yuan versus the basket, according to the latest research report from Scotiabank.
China’s factory activity expanded for the second straight month in December, with rising output sub-index and dipping new orders sub-index. The nation’s official manufacturing PMI came in unchanged at 50.2 in December, compared to market expectations for 50.1.
Further, the output sub-index rose to a 16-month high of 53.2, while the new orders sub-index dipped slightly to 51.2 from 51.3 in November. More importantly, easing trade tensions with the US lifted the new export orders sub-index above the 50 threshold for the first time since May 2018.
China is expected to implement more stimulus measures in addition to a 50 bp RRR cut effective from 6 January to further boost credit supply and revive economic growth, the report added.
Further reductions in the rate of the 7-day reverse repos, 1-year MLF and 1-year LPR would pull down the front-end CNY IRS/NDIRS, while steepening the curve in the run-up to the Chinese New Year (25 January).
On the FX side, the PBoC has been setting USD/CNY in line with market expectations since mid-October. The yuan is expected to advance moderately in the coming weeks, catching up with recent gains in regional peers such as the KRW and TWD.
"We maintain our short USD/CNH position amid sustained risk appetite arising from easing trade tensions with the US and the PBoC’s monetary easing measures," Scotiabank further commented in the report.
