China Weekly Letter - Big jump in CNY on trade optimism and weaker USD

  • Big move higher in CNY - the tide has turned for the Chinese currency.
  • Trade talks on track - Liu He set to go to Washington later this month.
  • Stimulus is coming for consumers and small businesses.
  • Producer price inflation is heading for deflation territory.

Big move lower in USD/CNY - the tide has turned

USD/CNY moved sharply lower this week to 6.74, after flirting with the 7-level only two months ago. We see two main drivers behind the stronger CNY: (1) rising optimism about a trade deal with the US and (2) an overall weakening of the USD on the back of more dovish speeches by Federal Reserve members that suggest it will be on hold for a while.

Comment We believe the tide has turned for the CNY and the significant depreciation pressure is turning into a moderate strengthening trend. A halt to the weakening of the CNY is also likely to be part of a trade deal with the US. If we are right that they strike a trade deal and the Chinese economy recovers gradually from Q2, then the CNY should see more tailwind ahead. We plan to publish our latest forecasts in FX Forecast Update - January 2019 on Monday.

Trade talks on track - top-level negotiations later this month

The US and China wrapped up another round of trade negotiations in Beijing this week, with the mid-level talks being extended by one day. The extension is seen as a sign of a commitment on both sides to push forward as needed to reach a deal. Donald Trump tweeted during the talks that 'Talks with China are going very well!'. China stated that the meetings were 'extensive, in-depth and detailed' and laid the foundation for a resolution of the conflict (see Bloomberg , 9 January).

The talks seemed to be mostly on technical issues such as Chinese purchases of US products within agriculture, energy and some manufacturing products, while the bigger hurdles are left for higher level officials. China's head of the negotiations, economic tsar and vice-President Liu He, is scheduled to meet with US Trade Representative Robert Lighthizer in Washington later in January. Some reports suggest 30-31 January (see The Straits Times, 11 January). Surprisingly, Liu He showed up shortly at the negotiations in Beijing, which added to the sentiment that talks were constructive, as there was no official at the same level from the US delegation.

North Korea's leader Kim Jong-Un visited China this week on his birthday. It was seen by some as putting pressure on Trump to make a deal (see New York Times , 8 January). Kim Jong-Un and Xi Jinping discussed a summit between Kim and Trump expected to take place soon (see Reuters , 8 January). According to state media in North Korea, Xi Jinping accepted an invitation to visit the country (see SCMP , 10 January).

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