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The USD/CNY currency pair is expected to trade between 6.80-6.95 in the renegotiation period. The pair will head for 6.80 and then 6.70 if the US and China make a concrete progress in the trade talks or agree to a partial/comprehensive trade deal, according to the latest research report from Scotiabank.
The yuan weakened ahead of the renewed US-China trade talks set for 30-31 July in Shanghai, partly due to low expectations for any significant breakthrough. It is the first face-to-face meeting between the two nations since talks on their year-long trade war collapsed in early May.
The Global Times, a state-run nationalist daily, said in an editorial last Friday that it is "widely believed that trade talks will take a long time" and the chance of getting a deal could be missed if Washington continues to put pressure on Beijing.
On the US side, White House economic adviser Larry Kudlow said in an interview with CNBC last Friday that he does not expect a grand deal from next week’s trade talks with China but that US negotiators hoped to reset the stage for further productive talks on reducing trade barriers, according to Reuters.
In addition, the yield spread between the 10Y Chinese government bonds (CGBs) and the 10Y USTs has been widening, propping up the yuan to some extent. Foreign investors have purchased a net USD 1.47bn of mainland China shares month-to-date, supportive of the yuan as well.
From a fundamental perspective, however, China’s economic slowdown could keep weighing on the yuan in the near term. Aggregate profits of Chinese companies with annual revenues of more than CNY 20mn fell 3.1 percent y/y in June, the report added.
Moreover, China’s coal consumption for electricity generation tumbled about 17 percent y/y in the period of 1-24 July, indicating a still-weak economic momentum. The nation’s official manufacturing PMI for July is expected to stay below the 50 threshold that separates expansion from contraction on a monthly basis.
