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USD/CNY Drops As PBoC Injects More Liquidity Into Economy

August 24, 2020 at 13:00 by Andrew Moran

Chinese 100-yuan notesThe Chinese yuan is enjoying another session of modest gains to start the trading week, with much of the strength coming at the expense of the US dollar. The yuan’s ascent on Monday is being driven primarily on the central bank injecting more liquidity into the financial system. Could the yuan test 6.8 next? The currency’s performance may hinge on US-China trade talks as it will be quiet on the data front this week.

On Monday, the People’s Bank of China (PBoC) announced in a statement that the institution injected approximately $14.45 billion into the market through seven-day reverse repurchasing agreements at an interest rate of 2.2%. It also pumped $8.68 billion through 14-day reverse reports at a rate of 2.35%. In total, about $8 billion of reverse repos matured on Monday.

The central bank confirmed that the purpose of the move was to ensure ample liquidity levels in the banking system. A reverse repo facilitates this objective because the PBoC buys securities from commercial institutions through bidding, with an agreement to sell them back in the future.

Macroeconomic data will not move the yuan one way or another because the crucial manufacturing and non-manufacturing purchasing managers’ index (PMI) readings will be released next week. The early estimates point to continued expansion in activity in August.

Analysts warn that traders will begin to be anxious if Washington persists in delaying a review over the phase one trade agreement, as well as negotiations surrounding the second phase. President Donald Trump recently told reporters that he does not wish to engage in talks regarding phase two, while Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer postponed their virtual weekend meeting with Vice Premier Liu He.

Investors might examine Beijing’s newest initiative to raise the yuan’s prevalence in global financial markets. The PBoC and the central government have made it clear that they want the yuan to be used more in foreign transactions, leading some observers to believe this is China potentially accelerating the de-dollarization crusade that a lot of countries are beginning to push.

The USD/CNY currency pair tumbled 0.1% to 6.9125, from an opening of 6.9195, at 12:51 GMT on Monday. The EUR/CNY advanced 0.31% to 8.1875, from an opening of 8.1633.

If you have any questions, comments, or opinions regarding the Chinese Yuan, feel free to post them using the commentary form below.

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