China’s yuan inches higher, Sino-US trade talks in focus

SHANGHAI: China’s yuan inched higher against the dollar on Monday as market hopes for positive developments in Sino-US trade talks offset deepening deflationary pressure and slowing exports.

Top US and Chinese officials will sit down in London on Monday for talks aimed at defusing the high-stakes trade dispute between the two superpowers that has widened in recent weeks beyond tit-for-tat tariffs to export controls over goods and components critical to global supply chains.

The meeting comes just days after leaders of the two countries spoke by phone, with many market participants believing the call effectively reduced risks of further escalations in trade dispute.

“While significant uncertainty remains, we think the Trump-Xi call reduces the tail risk of trade war escalation, at least near term,” Barclays analysts said in a note.

As of 0403 GMT, the onshore yuan was 0.1% higher at 7.1873 per dollar, while its offshore counterpart was trading 0.03% firmer at 7.1869.

Prior to the market opening, the People’s Bank of China (PBOC) set the midpoint rate at 7.1855 per dollar, and 155 pips firmer than a Reuters’ estimate of 7.2010.

The spot yuan is allowed to trade 2% either side of the fixed midpoint each day.

However, optimism over the upcoming trade talks was tempered by weak Chinese economic data.

China’s May export growth slowed to a three-month low as US tariffs slammed shipments, while factory-gate deflation deepened to its worst level in two years, heaping pressure on the world’s second-largest economy on both the domestic and external fronts.

“Persistent deflationary pressure combined with signs of economic slowdown could combine to allow for the PBOC to ease monetary policy further later in the year,” said Lynn Song, chief economist for Greater China at ING.

China’s yuan slips against dollar

“However, the next (rate) cut could take some time as the PBOC may choose to observe economic trends for a few months.”

In Hong Kong, the Hong Kong dollar slipped to a low of 7.8478 per US dollar and traded not too far from the weaker end of its trading band.

Hong Kong will maintain its currency peg to the US dollar, the financial hub’s leader John Lee said in an interview published on Monday, despite escalating geopolitical tensions and some calls to shift to a Chinese yuan peg.