China Money Week: PBOC May Use Yuan Strength As Window To Ease

By Stuart Allsopp

     SINGAPORE (MNI) - The yuan has been the major currency outperformer in the

last 7 days, coming after MNI turned tactically bearish on USDCNH last week,

with the pair holding losses despite risk assets elsewhere, including Chinese

stocks, giving back all their gains. 

     This yuan strength has also occurred alongside a further decline in Chinese

interest rate swaps.

     Our sense is that the slight recovery in the yuan is giving policymakers

room to ease to support growth without crashing the yuan. Rates have moved lower

since the relatively positive meeting between Presidents Xi Jinping and Donald

Trump in anticipation of a potential cut in interbank rates or reserve

requirements. 

     The reserve ratio requirement (RRR) has been cut four times this year and

another before year-end or in early-2019 is looking likely.

     The increasingly easy policy bias suggests that the yuan's continued

strength will lack required fundamental support. In order for the rally to

continue, we would likely need to see a recovery in stocks reflecting a pickup

in broad risk appetite towards China. 

     Failing this, a continued drop in oil prices would likely be needed to

support China's terms of trade and keep inflation expectations low.

--MNI Singapore Bureau; +65 8233 2326; email: Asia-Editor@marketnews.com

[TOPICS: M$A$$$,M$Q$$$,MI$$$$,M$$FI$]