Yuan recovers some ground but caution remains as trade war looms

PUBLISHED : Wednesday, 04 July, 2018, 11:18am
UPDATED : Wednesday, 04 July, 2018, 11:25am

China’s yuan rebounded for a second day on Wednesday as the currency took a breather from its sharp depreciation in recent weeks, although bearish sentiment lingered as the US prepares to implement tariffs on US$34 billion of Chinese imports on July 6.

The recovery came after the People’s Bank of China (PBOC) said it would keep the nation’s currency stable and not deploy it as a weapon in the trade conflict with the US, calming worries that any escalation in the standoff would lead to a slowdown in economic growth.

Hong Kong, mainland stocks edge lower as US tariffs loom closer

There had also been reports of suspected intervention, with some major Chinese banks selling the dollar after the yuan slid past 6.70 per dollar in the swaps market.

Offshore yuan had dropped to an 11-month low of 6.7332 per dollar before recouping its losses to finish 0.33 per cent higher on Tuesday. It rose further, by 0.41 per cent, to 6.6384 on Wednesday morning.

But traders think the respite in the currency may only be temporary, and remain very bearish amid the trade tensions and waning Chinese growth momentum.

On Friday, the US will begin collecting 25 per cent tariffs on Chinese goods worth US$34 billion. Analysts expect China to reciprocate, marking the official start of a trade war.

“Tuesday’s interventions could be little more than a short-term reprieve. And ultimately, unless there’s compromise in the trade dispute, the yuan should remain under pressure,” said Stephen Innes, regional head of trading at Oanda.

On Wednesday, the central bank lowered the yuan’s daily reference rate by 0.15 per cent to 6.6595 per dollar. The currency is allowed to trade up to 2 per cent either side of this fixed point.

DBS’ chief economist Taimur Baig said that while it may still be unlikely, it was time to consider the global implications of a full-blown trade war.

Beijing will retaliate on multiple fronts, probably extending its punitive measures beyond goods to trade in services and to the operations of US companies on mainland China, Baig said.

DBS estimates that an all-out trade war, defined as the imposition of tariffs of 15 to 25 per cent on all products that are traded between China and the US, could shave 0.25 per cent of GDP off both economies’ output this year, while the damage would be far greater in 2019.

Qi Gao, emerging market Asia currency strategist at Scotiabank, said that while the yuan may consolidate at its current level before July 6, it will remain susceptible to the headlines and is unlikely to rebound markedly.