China may eventually cede its battle against USD tide
Nov 27 (Reuters) -China's central bank is stubbornly battling the USD onslaught via its daily fixingto calm nervous investors fearing a rapid yuan decline. Yet markets are still betting that Beijing will eventually allow the yuan to move more in line with fundamentals.
The widening U.S.-China bond yield gap is a prime factor driving USD/CNY upwards, as expectations of slower rate cuts by the Federal Reserve contrastwith the view that China will have to ease monetary policy further.
While China's one-year medium-term lending facility rate was held steady on Monday as expected, a cut in banks' reserve requirement ratios as well as keylending rates is still anticipated.
With the incoming Trump administration looking toincrease pressure on China's economy via harsher trade restrictions, bearish views on the yuan havesolidified.
Even if Saturday's official NovemberPMIs show improvement due to recent stimulus measures taking effect, USD/CNY dip-buyers will likely be attracted tokey technical support levels at 7.2185, the 78.6% Fibonacci retracement of the July-Septemberdrop, and the 200-day moving average at 7.1937 which reinforces the 7.2000 psychological barrier.
China's exports should jump in the coming months due to front-loading before Trump's promised tariffs are enacted. But that's likely to be shrugged off astemporary, and won't change the view that China's central bank will eventually move its line-in-the sand for the USD/CNY daily benchmark to 7.3000 from 7.2000 currently.
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Ewen Chew is a Reuters market analyst. The views expressed are his own. Editing by Sonali Desai
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