Yuan eases as China-US trade talks in Washington end in deadlock

PUBLISHED : Thursday, 20 July, 2017, 3:26pm
UPDATED : Thursday, 20 July, 2017, 3:26pm

China’s yuan edged down on Thursday as the Comprehensive Economic Dialogue in Washington ended in deadlock, with the US and China failing to agree any major steps to reduce their trade deficit.

The annual economic dialogue session ended with cancelled news conferences, no joint statement and no new announcements on US market access to China, casting a shadow over their trade relations amid White House threats to impose steel and aluminium tariffs on Beijing.

“The changing China-US relationship could become a risk factor to the yuan outlook in the rest of this year,” Ken Cheung, an analyst at Mizuho, wrote in a note. “President Trump may employ a more hardline approach towards China as geopolitical tensions in North Korea cool, and given President Trump’s political setbacks in domestic policy.”

The yuan edged down 0.2 per cent to 6.7656 per dollar on Thursday, after the People’s Bank of China lowered the daily reference rate by 0.02 per cent to 6.7464 per dollar.

The changing China-US relationship could become a risk factor to the yuan outlook in the rest of this year
Ken Cheung, analyst, Mizuho

However, sentiment towards the currency appears to be relatively stable for now. Foreign exchange net settlement on behalf of clients in June dropped to minus 923 billion yuan, from minus 852 billion yuan (minus US$126 billion) in May. The data reflects increasing forex demand from companies and individuals for travel purposes ahead of the summer holidays, while the recent dollar weakness may further undermine foreign exchange demand, Cheung said.

The yuan has gained about 2.9 per cent so far this year, and has recently been testing the 6.7500 level on the back of the dollar’s slide and stronger-than-expected China GDP growth at 6.9 per cent for the second quarter.

Chart technicals suggest that any repeated strength in the yuan above 6.7500 will open the door to further gains towards 6.7300, Lukman Otunuga, a research analyst at ForexTime, wrote in a note.

If China’s macro fundamentals continue to improve, speculation that 2017 may turn out to be a golden year in which the nation experiences an economic rebound may rise, Otunuga said.

Separate comments in recent days by central bank adviser Huang Yiping and Yang Guozhong, deputy head of the State Administration of Foreign Exchange, suggesting that the yuan’s trading band should be widened further have had little impact on the currency. In any case, the yuan rarely moves as far as the daily upper or lower limits, which are set 2 per cent either side of the daily reference rate. Analysts are thus skeptical about whether the trading band needs to be widened further.

However, Qi Gao, a forex strategist at Scotiabank, said if talk about widening the currency band continues to be broadcast, then it may indicate the nation’s commitment to further reforming the exchange rate regime, which is a bullish signal for the currency.