CNH Firms On Tariff Talk

Lower US tariffs on Chinese exports could spur a further sharp recovery in CNH, but it remains to be seen if relief is delivered ahead of US mid-term elections.

• CNH firmed in early London trade as US President Biden stated that he will review tariffs with Treasury Secretary Yellen when he returns to the US later this week.
• USD/CNH dipped sub 6.6600 but we didn't see a great deal of follow through selling by the market and we open around this level this morning.
• There may be a degree of skepticism in the market as to whether tariffs will actually be lowered ahead of mid-term elections in the US in November.
• Bringing down inflation is the Biden administrations top priority, but two studies by the Peterson Institute suggest that the positive impact on inflation would be negligible in the near term (-0.3ppts of annual inflation), with larger benefits taking longer to materialize (9-15 months out).
• With minimal near-term inflation benefit, the Biden administration may be unwilling to be seen as softening its stance on China ahead of the mid-term elections.
• This is also not the first time Biden has mentioned the possibility of lower tariffs. Nevertheless, it will likely remain a strong focus point for USD/CNH watchers in the near term.
• The USD/CNY fix will also be watched today. Yesterday saw a modest downside fixing surprise in USD/CNY terms (-25pips).