Offshore yuan strengthens by the most in three months as US and China defer escalating trade war

PUBLISHED : Monday, 09 July, 2018, 11:41am
UPDATED : Monday, 09 July, 2018, 7:08pm

The offshore yuan strengthened by the most in three months on Monday, taking a cue from the recovery in Asian equity markets, as the United States and China both took a break from further escalating tensions in the trade war between the world’s two biggest economies.

The yuan’s offshore value rose by as much as 0.56 per cent to 6.6262 per US dollar, heading for its biggest daily advance since March 26. The currency’s onshore value was as strong as 6.6193 per US dollar the same day.

Signs were pointing to a softer US stance towards China, even after both countries fired the first salvoes in their trade war last week, analysts said.

The office of the US Trade Representative announced a product exclusion process for Chinese products subject to Section 301 tariffs, seeking to soften the blow on US companies a little. Judging by the retaliatory tariffs targeted at a range of US agricultural goods so far, China also seemed to be avoiding an escalation in trade tensions, analysts said.

“The escalations in the trade conflict have halted for now, pushing up stocks and the Chinese yuan,” said Jimmy Zhu, chief strategist at New Zealand-based brokerage Fullerton Markets. “Capital controls were also effective in stopping China’s foreign reserves from shrinking, even as the yuan dropped sharply last month.”

China’s June foreign exchange reserves increased by US$1.51 billion to US$3.112 trillion, according to data released by the People’s Bank of China, the country’s central bank, 0.3 per cent more than the level expected in a Bloomberg survey of economists.

The increase in reserves came even as the Chinese currency’s offshore value deteriorated by 3.3 per cent against the US dollar in June, its biggest monthly decline since 1994, when China pegged the yuan against the US dollar.

Many analysts expect the yuan’s value to stabilise at between 6.6 and 6.7 per US dollar in the coming week or so.

China’s resilient foreign exchange reserves mean the country still has enough room for the currency to weaken in the event the trade war with the US gets protracted, said ING Bank economist Iris Pang.

The ANZ Bank Greater China chief economist, Raymond Yeung, said policymakers were becoming more successful in giving the currency more freedom, letting the yuan decline without triggering market panic, even as China loosens cross-border flows.

China’s yuan forwards market was also showing benign conditions, with one-month forward points hitting a seven-year low of 10 points last week. This shows currency traders’ need to hedge themselves against a sharp currency depreciation remains low.

The currency market’s focus may turn to the US Federal Reserve this week, as any downside risk from tariffs had already been discussed during the June 13 Federal Open Market Committee meeting, according to minutes released last week.