SHANGHAI: China’s yuan managed to steady at a 3-1/2-month low against the dollar on Tuesday, as signs of tighter cash conditions offshore and a firmer-than-expected official guidance helped prevent further selling of the Chinese currency.
The yuan has been put to the sword recently by Donald Trump’s return to the White House, as investors worried about higher tariffs on Chinese goods and hostile trade relations between the two economic giants in the next four years.
During Trump’s first presidency, the yuan weakened about 5% against the dollar in the initial round of US tariffs on Chinese goods in 2018, and fell another 1.5% a year later when trade tensions escalated.
As part of his pitch to boost American manufacturing during the recent election campaign, Trump said he will impose tariffs of 60% or more on goods from China.
The proposed tariffs, as well as other policies such as tax cuts, are seen as inflationary and likely to keep US interest rates relatively high in a blow to currencies of trading partners.
Since the Nov. 5 US election, the yuan has fallen around 1.8% against the dollar.
The People’s Bank of China (PBOC) again set a firmer-than-expected midpoint fixing, a practice it has continued since Wednesday, with traders and analysts interpreting it as an official attempt to rein in yuan weakness.
The midpoint rate, around which the yuan is allowed to trade in a 2% band, was fixed at 7.1911 per dollar, 394 pips firmer than a Reuters’ estimate of 7.2305.
“We expect the CNY to consolidate in the near term as daily USD/CNY fixing has started to signal discomfort on the recent fast pace of depreciation,” analysts at Barclays said in a note.
China’s yuan steady on PBOC guidance; outlook shaky on US tariff risks
“That said, we remain bearish on CNY over the medium term, as we expect any positive external sector impulse to fade and expect weaker external demand and tourism outflows to weigh on the current account.”
As of 0300 GMT, the onshore yuan was 0.06% lower at 7.2357 to the dollar, not far from a 3-1/2-month trough of 7.2476 hit on Thursday.
In addition, in offshore markets, yuan’s liquidity conditions have shown sign of tightness, as the dollar/offshore yuan’s tomorrow-next swap points – a gauge that measures yuan’s funding costs via currency forwards – kept trending higher.
Hong Kong Interbank Offered Rate benchmark (CNH HIBOR) rose across tenors, with the overnight tenor hitting the highest level since April 19 on Tuesday.
Higher offshore yuan funding costs, “together with the re-emergence of the PBOC’s downside bias in the USD/CNY fix signal a determination to defend USD/RMB ahead of the 7.30 level,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.
The offshore yuan traded at 7.2358 yuan per dollar around midday, compared with the previous close of 7.2260.
American Dollar Exchange Rate