USD/CNY to trade range-bound before and after a stepped movement in response to any surprise progress in US-China trade tensions, says Scotiabank

The USD/CNY currency pair is expected to trade in a tight range before and after a stepped movement in response to any surprise progress in the U.S.-China trade tensions, according to the latest research report from Scotiabank.

The PBoC has been setting USD/CNY with a downward bias since August 6 to ease market concerns over the yuan depreciation. In the meantime, the central bank said in its Q2 monetary policy implementation report released on August 9 that it will play the role of the yuan exchange rate as an automatic stabilizer to adjust macro economy and international balance of payments, a statement mentioned by Chinese regulators for the first time.

China’s total social financing (aggregate financing), a broad measure of credit that includes new bank loans, entrusted loans, short-term bill financing and other financing from non-banking institutions, dropped to CNY1.01 trillion in July from CNY2.26 trillion a month earlier.

Meanwhile, the nation’s broad M2 money supply grew 8.1 percent from a year earlier, slower than the June pace of 8.5 percent. While China continues to rein in shadow banking with the aim of de-risking the economy, slowing bank loans shows traditional lenders are reluctant to shoulder the gap.

In addition, we note a CNY438.5 billion of local government special bonds were issued last month for local infrastructure projects. China’s money and credit supply grew at a slower-than-expected pace in July, casting a shadow on the economic growth and raising market expectations of more monetary easing measures to be rolled out the rest of the year.

Foreign investors are expected to keep pouring funds into China’s bond markets going forward, with more than USD15 trillion of negative-yielding debt around the world. The latest developments in the US-China trade disputes will improve risk sentiment across the markets, bringing at least a temporary relief to EM Asian currencies including the yuan.

China’s Ministry of Commerce said Tuesday that Vice Premier Liu He talked with US trade representative Robert Lighthizer and Treasury Secretary Steven Mnuchin by phone on 13 August and that the two nations plan to hold another telephone call in two weeks on trade.

Minutes later, the US Trade Representative office announced that the US is delaying imposing tariffs on some imports from China until December 15 because of "health, safety, national security and other factors," including mobile phones, laptops, video game consoles, some toys, computer monitors, and certain footwear and clothing. US President Donald Trump told reporters that the delay was in part to avoid hitting US shoppers this Christmas.