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The yuan is expected to follow a broader market tone, with USD/CNH likely to trade at a premium to USD/CNY. At the initial stage, Beijing would tolerate more appreciation in the CNY to help reduce its trade surplus with the US should the USD weaken broadly, according to a recent research report from Scotiabank.
Geopolitical tensions on the Korean Peninsula have eased markedly this year, as indicated by South Korea’s falling sovereign CDS premium. The improved geopolitical situation provides timing and room to Washington to escalate pressure on Beijing with the aim of reducing the enormous trade deficit of the US with China that rose 8.1 percent y/y to USD375.2 billion in 2017. It accounted for about 47 percent of total trade deficit (goods only) of the US.
According to Politico and The WSJ, the Trump administration is putting together a package of anti-China measures, to pressure Beijing to end requirements that US companies transfer technology to Chinese firms. The measures are expected to be announced this week or next, including tariffs targeting the equivalent of USD30 billion a year in Chinese imports, strengthened restrictions on Chinese investments, limits on visas to Chinese students, academics and executives and tighter controls on exports of certain goods or technologies that have both military and civilian uses.
David Malpass, US Treasury Under Secretary for International Affairs, said Sunday that the Trump administration ended decade-old economic talks with China because it believes the country is moving backward on opening its markets to foreign competition.
"We maintain our existing short USD/CNY position targeting 6.20. The prospect of the ECB tapering will continue bolstering the EUR over the remainder of the year, suggesting a modestly stronger CNY given its tight correlation with the single currency", the report added.
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