MNI CHINA MONEY WEEK: Trade Talks To Keep Yuan On Watch

     LONDON (MNI) - The U.S./China trade talks were back on traders radar

screens Friday, following Chinese media reports suggesting movement on the

wording of a joint statement between the two countries. State-owned Xinhua News

reported "substantial progress" on the wording, although there was no further

detail available.

     Obviously the exact wording of any agreements on the currency will be of

great interest, but there has been no advance on the weekend comments from

People's Bank of China Governor Yi Gang, who said negotiators reached agreement

on "many crucial and important" issues, when asked on the progress over the yuan

exchange rate issues in the trade talks, in an address made on Sunday.

     Yi went on to reveal that China and the U.S. discussed how to respect each

country's monetary authority's autonomy deciding monetary policies, adhering to

the principle of letting the market decide exchange rate, living up to promises

made in each G20 summit, as well as data disclosure according to IMF rules.

     --QUITE STABLE

     He noted that having a stable yuan doesn't imply a certain level against

the dollar, and yuan's value must be flexible to benefit China's economy and

stabilize the country's international payment, Yi said. The currency was "quite

stable" in 2018 and its volatility was much smaller than that of sterling/dollar

and euro/dollar, Yi said.

     The exchange rate isn't China's main focus while making monetary policy

which prioritizes domestic situation, and the expectation on the yuan exchange

rate has become more stable after China introduced more hedging tools and pushed

for more market-based reform, Yi said.

     The yuan has edged steadily higher since the turn of the year on a

trade-weighted basis, regaining around half of last year's fall, from peak to

trough, since November. Likewise, USDCNY has retraced the best part of 40% of

last year's trough to peak move. Even so, last year's swift renminbi devaluation

continues to provide worry for the U.S. negotiating team.

     --FIXING WATCH

     The daily USD/CNY fixings could generate increased interest again in coming

weeks. The PBOC fixed the mid-point above CNY6.70 on Thursday and Friday, with

Commerzbank suggesting that the PBOC might have used its "filtering mechanism",

which would "adjust some factors when determining the fixing rates and smooth

out the CNY exchange rates amid unusual market movements.

     However, a significant break below 6.70 on a sustained basis could be the

start of a move higher.

     China's annual National People's Congress wrapped up Friday with no

inference towards broader monetary stimulus outside of previously referenced

targeted measures. It would seem that the PBOC is keen to avoid pulling wider

monetary levers, fearful of the message that it will send, as well as the

knock-on implications that it may have for the country's credit markets and the

yuan.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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