HONG KONG: China's yuan weakened on Thursday in cautious trade ahead of next week's G20 meeting in Argentina, with traders unconvinced that a meeting between Chinese President Xi Jinping and U.S. President Donald Trump will lead to a trade war detente.
The market is not expecting any major developments in Sino-U.S. trade diplomacy ahead of the meeting, said Carie Li, an economist at OCBC Wing Hang Bank in Hong Kong.
"That's why we're seeing the renminbi staying range-bound, and within a tight range," Li said, adding that she expected the yuan to track movements in the dollar index.
A World Trade Organization (WTO) meeting in Geneva on trade practices showed few indiciations of rapprochement on Wednesday, with representatives of China and the U.S. each accusing the other country of hypocrisy in its trade practices.
Spot yuan was changing hands at 6.9293 at 05:25 GMT, 13 pips weaker than the previous late session close, after opening at 6.9355 per dollar.
Prior to the open, the People's Bank of China set the currency's daily midpoint rate at 6.9391 per dollar, firmer than the previous fix 6.9449, as the dollar weakened.
The global dollar index is down 0.07 percent at 96.644, compared with the previous close of 96.712.
Given that the market has such low hopes for concrete commitments from the Trump-Xi meeting, the yuan has the potential to rally back to the stronger end of the 6.8 range if the two leaders defy expectations to work out a deal, said a trader at a Chinese bank in Shanghai.
"If we don't have an agreement, the downside is not that huge. The renminbi will depreciate, but not at a rapid pace," he said.
A narrowing yield spread between U.S. and Chinese interest rates is expected to continue to put pressure on the yuan, with one-year Chinese government securities' yields seen lower than their U.S. counterparts earlier this week.
But compared with the upcoming G20 meeting, the shrinking spread has relatively little influence over the yuan's direction, said a second Shanghai-based trader at a Chinese bank.
"The spread is just one factor driving the yuan," he said. "If the spread does not widen too much, the exchange rate will still be driven by U.S.-China relations."
Li at OCBC said she expects a narrowing spread to add to pressures on the yuan only if the U.S.-China trade relations deteriorate and the Chinese central bank eases money supply further.
"We think the yuan will stay on the stronger side of 7 per dollar this year," she said.
The offshore yuan was flat, trading at 0.07 percent stronger than the onshore spot at 6.9245 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 93.06, firmer than the previous day's 92.93.
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