USD/CNY: Official announcement on tariff cuts could support the yuan – HSBC

US and Chinese presidents had their first extensive conversation in six months, discussing bilateral relations. The Wall Street Journal (WSJ) reported that the United States Trade Representative (USTR)  is looking into tariffs on Chinese imports. Economists at HSBC believe an official announcement on tariff cuts could see a knee-jerk response in USD/CNY.

The path towards a trade deal with even partial removal of tariffs could be bumpy

“The WSJ reported on 10 September that the Biden administration is considering launching an investigation into China’s subsidies under Section 301 of the US trade law, which could lead to new tariffs.”

“The article reported that the USTR does not plan to reduce tariffs on more than half of Chinese imports, but it has been looking into which tariffs are hurting the US economy or could substantially raise the costs of other parts of the Biden agenda (e.g. infrastructure building).”

“The path towards a trade deal with even a partial removal of tariffs could be bumpy. Also, the current USD/CNY level is not too far from the 6.35 level when the tariff threat first started in 2Q18. It is also worth noting that the 6.35 level is also the point when the People’s Bank of China raised its reserve requirement ratio for onshore FX deposits in May.”

“An official announcement on tariff cuts could see a knee-jerk response in the CNY; however, thereafter, we believe the market will shift its attention back to the USD bullish factors, including moderating global growth, the Federal Reserve’s tapering, and COVID-19.”