USD/CNY likely to trade within 6.7-6.9 amid renewing portfolio inflows ahead of  July FOMC meeting, says Scotiabank

The USD/CNY currency pair is expected to trade in a range of 6.7-6.9 amid renewing portfolio inflows ahead of the July FOMC meeting, with a downward bias, according to the latest research report from Scotiabank.

Further, the pair would reach the 6.4 level seen last June should the US and China reach a trade deal finally, in response to both further improving risk sentiment and potential demand from the US side in exchange for the US lifting all the additional tariffs.

"We allocate a 70 percent probability for this scenario. On the other side, the pair will surge to the 7.0 mark under the acquiescence of the PBoC, if the renewed trade negotiations fall apart at last, with a 30 percent chance," the report commented.

US President Donald Trump and Chinese President Xi Jinping held their highly anticipated bilateral meeting at the G-20 Osaka Summit on Saturday. Earlier Saturday, President Trump said at the outset of a bilateral meeting with Saudi Crown Prince Mohammad Bin Salman that he had already met with President Xi on Friday night and "a lot was accomplished actually last night."

In addition, Chinese President Xi Jinping on Friday announced five major policies that will further open up the Chinese market while improving the nation’s business environment.

The announcements include:

1) opening markets with the release of an updated negative list for 2019; 2) expanding imports with lowering tariffs and removing nontariff trade barriers; 3) improving business environment with a Foreign Investment Law to be enacted at the beginning of 2020; 4) treating foreign companies equally with a complain system to be established and; 5) pushing forward trade talks.

Generally speaking, risk-on sentiment will continue in general ahead of the July 30-31 FOMC meeting, undermining the dollar against EM Asian currencies.

Meanwhile, risk aversion could resurface from time to time post the July 30-31 Fed gathering as 1) it is not easy for the US and China to reach a comprehensive trade deal and; 2) the Fed may turn less dovish than the market has discounted, particularly if US macro data improve. The Fed Funds Futures have lowered the odds of Fed rate cuts at the coming FOMC meetings, Scotiabank further noted.