Currency traders poised to pounce as US trade war keeps the Chinese yuan weaker

Beijing is expected to tolerate a weaker yuan to help exporters offset the effect of higher US tariffs, although the yuan-to-dollar slide should be modest

Other currencies expected to be caught in the slipstream of trade war tensions include the yen and won

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The currency market envisages that a renewed yuan weakness against the US dollar will be sustained rather than fleeting. Photo: Reuters

Neal Kimberley

UK-based Neal Kimberley has been active in the financial markets since 1985.

Published: 2:00pm, 14 May 2019Updated: 10:29pm, 14 May 2019

For participants in the currency market, trade wars offer plenty of moneymaking opportunities. The decision of the Trump administration to raise the stakes in the China-US trade war is one such opportunity.

Given reignited China-US trade tensions, the foreign exchange market may logically expect renewed and sustained yuan weakness, and that Beijing might well be inclined to tolerate some decline in the renminbi’s value to partially counter the effect of Washington’s tariff hikes on Chinese exporters.

“With tariffs rising to 25 per cent for now but ongoing discussions likely to continue”, HSBC expects that “heightened [yuan] volatility should occur”. HSBC has revised its second- and third-quarter expectations for the US-dollar-to-yuan exchange rate to 6.95 in both cases, as opposed to prior forecasts of 6.70 and 6.75 respectively. However, the firm sees China-US trade tensions moderating and has kept its year-end forecast at 6.75.

By the same logic, if markets sense that the US-imposed tariff hikes might be reversed, the yuan might react positively.

But currency traders should not just be focusing on the daily moves in the spot price when seeking to gauge whether the market as a whole has a real conviction that sustained yuan weakening is a real possibility.

The yuan may not necessarily trade against the US dollar in a band that has parameters pre-agreed on by Beijing and Washington which both sides would defend, but it is probably fair to say that for the dollar-yuan exchange rate, the 7.00 level has become totemic.