FxWirePro: Chinese Yuan still sluggish ahead of bilateral US-China trade talk- Strategic updates on CNH CFETS TWI

The key round of China-US trade talks will start tomorrow, and it looks like the mood of suspicion is growing. US Treasury Secretary Steven Mnuchin said: “My expectation is that we’ll make significant progress at these meetings, but I would just emphasize these are complicated issues.”

Media reported that China will offer more purchases on American agricultural goods and energy products, while there is still a big gap on issues including forced technology transfer and unfair subsidies to certain sectors. In addition, the US has officially charged one Chinese technology giant with stealing technology and breaking the sanctions against Iran.

For now, the CNY FX still faces multiple challenges in our view: 

1) An improved US-China trade situation, by reducing market concerns of an immediate US recession, could bring the Fed back into play at a later point;

2) China’s desire to maintain lower rates for longer, a point which is reinforced by the trend rise in the ratio of net domestic assets in the PBoC's balance sheet;

3) China’s stimulatory efforts of the past few months may also translate into higher imports, thereby pressuring an already low current account balance (0.4% of GDP);

4) CNY FX valuations continue to screen on the rich side.

Both CNY and CNH weakened somewhat this morning on the rising uncertainties surrounding the trade talks.

Update on Strategy: We cut our long USDCNH 1yr outright before the trade truce but we maintained our short CNH TWI basket trade, which proved costly. However, we don’t believe the fundamental and valuation backdrop is supportive of a renewed uptrend in the TWI. On this basis, we will manage our short CNH CFETS TWI basket position (entry 92.20, current 93.91, 1 month carry cost is -7bps). Courtesy: JPM & Commerzbank

Currency Strength Index: FxWirePro's hourly CNY spot index has shown -101 (which is bearish), while hourly USD spot index was at -35 (bearish), while articulating at 13:05 GMT.

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex