China's yuan softens on weak hopes for trade talks; dollar recovers

HONG KONG: The Chinese yuan weakened on Tuesday amid skepticism over whether the first negotiations in Beijing would succeed in de-escalating the Sino-US trade war, and as the US dollar pared losses.

Before the talks got underway, US Commerce Secretary Wilbur Ross predicted the world's two largest economies will be able to reach a "reasonable settlement" that "addresses all of the key issues", but traders were unconvinced.

"They may not announce anything concrete," said a Shanghai-based trader with Chinese bank. "The impact won't be that big on the exchange rate."

In the spot market, the yuan traded at 6.8570 per dollar at midday, 65 pips weaker than the previous late session close and 0.25 percent softer than the midpoint.

The midpoint rate was set at 6.8402 per dollar by the People's Bank of China prior to market open, firmer than the previous fix of 6.8517.

The greenback slumped on Monday after US Federal Reserve Chairman Jerome Powell signalled that he would be patient and flexible in policy decisions in 2019 amid slower economic growth globally.

The yuan weakened as the global dollar index regained some ground in Asian morning trade, rising to 95.922 from the previous close of 95.666.

Carie Li, a Hong Kong-based economist at OCBC Wing Hang, said global investors "are overreacting a little with these dovish expectations, even pricing in a rate cut in the market, (when) it is still possible that the Fed will hike two times in the first half of this year."

She said that the yuan would continue to face downward pressure as China eases its money supply. The PBoC announced a 100-basis-point cut to banks' reserve requirements on Friday to prop up lacklustre economic growth, and more loosening is widely expected to follow.

"While fiscal policy...will likely do the heavy lifting, the central bank has been asked to keep liquidity ample and market interest rates stable," Standard Chartered economists Lan Shen and Shuang Ding said in a note Tuesday.

"We now expect another 200 bps of broad RRR cuts for the rest of 2019," they said.

A persistent divergence of US and Chinese monetary policies will compress two countries' interest rate spread, maintaining pressure on the yuan, Li added.

In the near term, however, "it is likely that there will be huge volatility in the renminbi" given the optimism around the trade talks, analysts at China Construction Bank (Asia) said in a memo on Tuesday.

The offshore yuan was trading 0.09 percent weaker than the onshore spot at 6.8635 per dollar.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 93.31, slightly weaker than the previous day's 93.36.