Yuan recovers some ground but caution remains as trade war looms

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.

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.