(25 FEBRUARY 2019)DAILY MARKET BRIEF 2:Yuan in demand as trade tariffs fears ease

After six days of intensive trade discussions that extended over the weekend, the US and China appear to have made significant progress. President Donald Trump has announced that the US will delay imposing further trade tariffs on Chinese goods. Following this headline, Asian markets have been rallying forcefully across the board, with China's mainland CSI 300 bouncing +5.95% to 3,729 — back to June 2018 highs, its biggest rise since July 2015. Hong Kong's Hang Seng closed +0.50% at 28,959. No details of the breakthrough have been communicated, suggesting that both sides are still working on an enforcement mechanism to guarantee structural reform commitments.

Both CNH and CNY have been bouncing at seven-month highs, while a global risk-on sentiment among G10 currencies is emerging. Despite this easing, which should support a Chinese economy that faces a slowdown, we remain highly doubtful as to the sustainability of the current trend since the Chinese authorities are expected to continue deleveraging which, looking forward, should support the opposite. Although both sides have agreed to keep the pair stable, a decline in the Chinese yuan is not ruled out.

Currently trading at 6.6894, USD/CNY is heading along 6.68 short-term.