SHANGHAI: China’s yuan slipped against the dollar on Friday, with investors cautiously monitoring developments in Sino-US trade and keen to know if there would be a phone call between the leaders of the two nations.
Beijing on Tuesday slapped tariffs on US imports in an immediate response to new US duties on Chinese goods which President Donald Trump said were aimed at punishing China for not halting the flow of illicit drugs.
Trade tension between the world’s two largest economies was one of the main drags on the yuan during Trump’s first term. The yuan fell more than 12% against the dollar between March 2018 and May 2020.
This time around, the People’s Bank of China (PBOC) has set firmer-than-expected midpoint guidance to keep the yuan stable, currency traders and analysts said. Offshore yuan conditions also showed a tightening bias to raise the cost of shorting the Chinese currency.
“China has announced retaliatory tariffs and other measures, but hopes of US-China negotiation are alive and the stable USD/CNY fix this week is signalling the authorities have no intention of letting the currency weaken yet,” Jennifer Kusuma, senior rates strategist at ANZ, said in a note to clients.
Prior to the market opening, the PBOC set the midpoint rate , around which the yuan is allowed to trade in a 2% band, at 7.1699 per dollar. That was 1,081 pips firmer than a Reuters’ estimate of 7.2780.
The central bank has set its official guidance on the firmer side of market projections since mid-November, which analysts and traders say is a sign of unease over the yuan’s decline.
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As of 0315 GMT, onshore yuan was 0.03% lower at 7.2860 to the dollar and looked set for a weekly drop in a holiday-shortened week. Its offshore counterpart traded at 7.2890 yuan.
Major state-owned banks were seen actively swapping yuan for US dollars in the onshore swap market before quickly selling the dollars in the onshore spot market to prevent the yuan from falling too much, multiple traders said.
Recent strength in the yen also helped alleviate some downside pressure on the yuan, traders said. The Japanese currency climbed to a nine-week high on market bets for more interest rate hikes in Japan this year.
Separately, the uncertainty around the trade relations prompted some analysts to predict monetary easing measures in China would be delivered later than initially expected.
“Our view has been that Beijing is now less willing than during the 2018-19 trade war to tolerate significant yuan depreciation versus the dollar, because of the mandate to foster a ‘powerful currency’ and stabilise property and stock markets,” said Ting Lu, chief China economist at Nomura.
He said he has pushed back his forecast for two 15-basis-point rate cuts in 2025 to the second and the fourth quarter of this year from the first and the second quarter previously.
Yield differentials between the United States and China hit the widest level on record earlier this month.
That could prompt money flows into dollar-denominated assets and increase depreciation pressure on the yuan.
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