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The USD/CNH currency pair is expected to trade towards 6.60-6.70 as the US and China are increasingly likely to reach a trade deal by the March 1 deadline, according to the latest research report from Scotiabank.
China's economic growth appears to be slowing faster-than-expected amid escalating risks of a synchronized global slowdown, with manufacturing activity contracting in December for the first time in more than two years. The PBoC said on Wednesday that it decided to relax evaluation rules for financial institutions eligible for a lower reserve requirement ratio (RRR) from 2019, in a move to boost lending to small and micro enterprises (SMES).
According to the statement dated 2 January, enterprises with a bank credit line of less than CNY 10mn now are seen as SMEs, up from the previous standard of CNY 5mn. The lenders will qualify for a lower RRR if their lending to these companies reaches a certain amount, which could release about CNY 500-700 billion of additional liquidity according to Scotiabank’s estimate.
In addition, the central bank will likely inject more funds to the banking system through TMLF loans, a RRR cut or a targeted RRR cut around the Chinese New Year holiday falling on 5 February this year. Depreciation pressure on the yuan has eased with implied vols and risk reversals of the yuan receding, the report added.
In addition, the PBoC pledged to keep the yuan exchange rate basically stable at a reasonable and equilibrium level with use of a variety of monetary policy tools, according to its Q4 monetary policy statement released on 27 December.
"We expect the US and China to reach a trade deal by the March 1 deadline. The world’s two largest economies are reportedly set to hold trade talks in Beijing next week. US President Trump said in a Cabinet meeting at White House on Wednesday that US-China trade discussion "is coming along very well," while China’s former vice commerce minister Wei Jianguo told Bloomberg on Thursday that the odds of a US-China trade deal are rising because both sides have a clearer sense of each other’s goals and intentions," Scotiabank commented.
