MNI CHINA MONEY WEEK: Clouds Part For A Yuan Recovery

--Oil Price Decline A Key Factor For Yuan Bounce

By Stuart Allsopp

     SINGAPORE (MNI) - While we have held a bearish view on the Chinese yuan for

several months, initially turning bearish back in May, a number of downside

drivers have subsided while upside drivers have emerged. This leaves USDCNH

susceptible to a bearish reversal on any positive developments in U.S.-China

trade talks over the coming days. A close below the 50-day moving average would

be a technically bearish signal.

     The main factor underpinning out bearish yuan view over the past 6 months

has been rising U.S real interest rates relative to China, which has in part

reflected the outperformance of US equities relative to China. 

     With U.S. equities coming under some pressure, expectations regarding the

pace of U.S. rate hikes have declined. At the same time, the perceived shift in

the Fed's stance has helped US inflation expectations rise, undermining real

yields.

     In China, while rate markets remain near cycle lows, market sentiment is

heavily weighted towards further easing which may not necessarily be forthcoming

should a breakthrough in trade talks occur. Equity markets are already showing

signs of stability, particularly in the offshore markets, which has often

preceded a recovery in rate expectations.

     --CRUDE FALL

     An additional factor supporting the yuan is the recent collapse in oil

prices. As a large net energy importer, the Chinese economy has been gifted with

the 30% drop in crude oil over the past two months. 

     Other large energy importers in the region have already begun to see their

currencies strengthen, with the KRW, TWD, and THB all outperforming. This,

together with the recent recovery in the euro, may allow the yuan to appreciate

against the dollar without triggering a notable decline in competitiveness.

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

[TOPICS: M$A$$$,M$Q$$$,M$$FI$,MN$FI$,MN$FX$]