The move is surprising, yet it seems that the latest rumors confirming that a Sino-American interim deal should not be signed until December does not turn in favor of the greenback and maintains the yuan in advance as market participants decide to take profits on long USD positions. Still, the question of upcoming tariffs on $156 billion Chinese imports officially due on 15 December 2019 is still on the table as Chinese negotiators request to rollback existing tariffs should be partially endorsed. Similarly, the introduction by the US legislature of a bill to prohibit the investment of a federal pension fund in mainland China shares for security reasons should not make the situation any easier. Despite the release of disappointing productivity data and considering that the Fed is not expected to intervene by next year, greenback strength will remain.
Constructive US – China trade talks and a lull in tariffs disruptions continue to support the case of stronger foreign investments into Chinese equities, as shown by September foreign holdings of Chinese equities rising for the fourth straight month to an historical high of CNY 1.77 trillion ($253 billion). The latter is also likely supported by the People’s Bank of China strong signal that it is ready to implement further monetary policy easing to support growth following the five basis points cut in the medium-term lending facility rate to 3.25%, a measure that should also reduce the prime rate for personal loans. Therefore, an equivalent reduction in existing tariffs on both sides should support both economies, as Chinese exporters were forced to reduce their prices by an average of 8% in the second half of the year, while US end consumers had to pay the bill.
USD/CNY (+1.63 year-to-date) is currently trading at 6.9739, largely above 7.0008 fixing and breaking psychological support of 7. The pair is expected to bounce back.
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