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Yuan Strengthens on Possible US-China Trade Deal

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The Chinese yuan edged higher on Monday, driven by news of a possible trade deal between the US and China.

The yuan gained 0.20 percent to 6.7030 against the dollar in offshore trade, closing in on its 7-1/2-month high of 6.6737 reached last week. The dollar/yuan pair last stood at 6.6996.

The People’s Bank of China (PBOC) set the midpoint rate at 6.7049 per dollar prior to market open, compared with the 6.6957 fix a day earlier.

Since late February, hopes of a trade agreement to end the year-long tariff dispute have strengthened the Chinese currency and latest developments on Sunday further reinforced such expectations.

US, China Nears Trade Deal; NPC Meeting in Focus

A US business newspaper reported on Sunday that based on the progress in trade negotiations, President Donald Trump and President Xi Jinping could seal a formal agreement at a summit around March 27.

The news followed comments from Trump last week when he called for the immediate removal of all tariffs on US agricultural products as the talks were going well.

Dates for a summit have not been specified, although China has already reserved a 10-day window starting March 20, according to the source with knowledge of the discussions.

Citing people familiar with the matter on both counties, the paper said in the pending deal, China would cut duties on US goods including agricultural products, chemicals, and automobiles in exchange for sanctions lift from the US.

However, the market might turn its attention away from the trade conflict soon.

The market will pay less attention to bilateral trade developments, and will instead re-focus on China data, Asian Emerging-markets Strategist Maximillian Lin stated.

Lin sees the yuan dropping at 6.8 per dollar by year-end after a modest increase in the coming months, as growth loses momentum and current-account surplus declines.

Delegates have already arrived in China for the National People’s Congress (NPC) that will take place later in the day. The country’s annual meeting usually draws market attention as it provides hints with regards to China’s economic and policy outlook.

The country’s parliament and investors are awaiting any statement on stimulus measures to undo a decades-low economic expansion.

Trade optimism also sent the Australian and the US dollar soaring. The Aussie was up 0.40 percent to 0.71055, before easing to trade at 0.7082, while the US dollar index added 0.04 percent to 96.493 against its peers, having risen to 96.51 earlier in the session, its best level since February 22.

That greenback’s rise suggested traders have looked past Trump’s criticism about the Federal Reserve’s monetary policy and a strong dollar.

Against the safe-haven yen, the greenback was down 0.02 percent to 111.88, hovering below its 10-week high of 112.08 hit on Friday. The pair slipped to 111.75 after Trump said the Fed’s tight policy was supporting a strong dollar and hurting US competitiveness.

Trump stated he wants a strong dollar but he would like a dollar that is great for their country not a dollar that is so strong that it is prohibitive for them to be dealing with other nations.

The growing sentiment helped offset some of the caution that followed weak US figures released on Friday. Survey data showed factory activity fell to its lowest since November 2016, while personal incomes plummeted for the first time in over three years.

Expectations that the US central bank will avoid hiking rates any time soon also provided additional boost on sentiment.

The European Central Bank (ECB), Australia, and Canada are likely to take either a dovish or neutral stance during their meeting this week, and that should support risk-on trades, according to Senior FX & Rates Strategist Shinichiro Kadota.

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