According to Frances Cheung, Research Analyst at Westpac, risk is to the downside for USD/CNY in the near-term as first, three Fed hikes by year-end are pretty much discounted, while expectation is also rising that the PBoC may hike interest rates.
“The PBoC rolled over the MLF (medium-term lending facility) that matured on Wednesday, but did not pre-emptively cover another MLF that is due to mature later in the month. Back in December, the PBoC raised the MLF rate by 5bp during the second offer of MLF in the month, just after the Fed hiked. This time round the second MLF is due to mature on 16 March, before the FOMC. But if the PBoC indeed wants to hike, it can raise MLF rate before that, or delay the granting of MLF. In any case, we believe the PBoC will mainly consider market supply and demand of funds when they make their decision.”
“Second, tariff and protectionist threats cloud the scope for USD gains, while on the other hand, the direct impact on China from potential tariffs on steel and aluminium imports is limited. These exports to the US amount to a meagre 0.2% of China’s total exports. Beyond this direct impact, it is premature to assess the implication from any wider coverage of products or heightened protectionism given high uncertainty as to how the situation will unfold.”
“The week ahead brings the monthly data-pack. New loan growth has probably slowed to below CNY1trn in February from CNY2.9trn in January. A high number in January is usual, as banks start their yearly plans, regardless of the timing of the Chinese New Year. And with the Chinese New Year in February, the contrast between January and February will be even more obvious.”
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