Yuan set to stay above 7 even if the US and China hammer out a trade deal

22Oct22nd October 2019

Yuan set to stay above 7 even if the US and China hammer out a trade deal

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*The Chinese currency has weakened in recent months as trade tensions between Washington and Beijing intensified.
*Stuart Oakley, global head of flow foreign exchange at Nomura, said he expects the yuan to be “stuck in a narrow range” until the first phase of the trade deal between Beijing and Washington is signed.
*For the Chinese currency to strengthen to a level below 7-yuan-per-dollar again, the market will need to see signs that “the elimination of existing tariffs is being seriously discussed,” according to Oakley.

The yuan will continue trading above 7-per-dollar even if the United States and China manage to ink a partial deal, experts say.
The Chinese currency, also known as the renminbi, has eased in recent months as trade tensions between Washington and Beijing intensified.

“The yuan will be stuck in a narrow range until we know for certain that Phase 1 of the trade deal is signed,” Stuart Oakley, global head of flow foreign exchange at Nomura, told CNBC by email.
Earlier this month, the U.S. and China appeared to have reached some common ground during high-level trade negotiations in Washington. A partial trade deal is currently being worked out between the two countries.
“I’d estimate that range to be 0.50% either side of 7.0750 up until 16th Nov — with a slight bias to the downside,” he said, referring to next month’s Asia-Pacific Economic Cooperation meeting which will be attended by U.S. President Donald Trump and Chinese President Xi Jinping. The currency pair will likely head toward 7.00 if the two sides are able to sign an agreement in Chile, he added.
For its part, the U.S. last week held off from raising tariffs from 25% to 30% on $250 billion worth of Chinese products.
According to U.S. officials, the new tariffs would go into effect if no agreement is in place before the next deadline on Dec. 15. Trump’s top economic advisor Larry Kudlow told Fox Business Network on Monday that he sees the possibility of the December tariff hikes being taken off the board if trade talks go well.
For the Chinese currency to strengthen to a level below 7-yuan-per-dollar again, the market will need to see signs that “the elimination of existing tariffs is being seriously discussed,” according to Oakley.
The yuan weakened past a psychologically important level of 7 per dollar in August, which led analysts to believe that if the U.S. continues to raise tariffs on Chinese goods, Beijing could let its currency weaken to help offset the impact of higher duties.
A weak currency makes a country’s exports cheaper on international markets, and therefore more attractive.
Chinese Vice Premier Liu He, the chief negotiator for Beijing, said on Saturday that both sides have made “substantial progress” in laying the foundation for the signing of a phased agreement, Reuters reported.
On Tuesday, the onshore yuan changed hands around 7.0721 per dollar. It has weakened 2.78% since August.
China maintains strict control of its currency’s exchange rate for the onshore yuan, which is traded on the mainland.
Trade deal optimism fades
After the proclaimed breakthrough in talks was announced, the yuan strengthened from levels near 7.11 to around 7.06 per dollar as markets cheered the possibility of easing trade tensions between the world’s two largest economies.
Since then, however, some of that optimism among investors has faded.
“The risk premium from (a) hike in tariffs on Oct. 15 has been reduced,” Christy Tan, head of markets strategy and research for Asia at the National Australia Bank, told CNBC by email.
She said the yuan’s move is closely related to the progress of the partial trade deal — China wants the U.S. to remove any new tariffs and dial back the previous ones. Tan said the bank predicts the currency could trade mostly above 7.0 per dollar. The “downside risk of our end 2019 forecast at 7.40 has increased with the recent development,” she said.
Other experts described the interim deal as “more like a truce without any real details.”
Alicia Garcia Herrero and Jianwei Xu from French investment bank Natixis explained that what has been released so far is a wrap-up of old measures.
“The rest are all China’s vague promises to address US concerns on intellectual property rights,” they said in a Thursday note, adding the country’s economic slowdown does not “bode well for a strong currency.”
Taking into account ongoing U.S.-China negotiations for a written agreement, as well as China’s slowing domestic economy, they predict the yuan could drop to 7.25 per dollar toward year-end, and to 7.45 in the next 12 months.
Nomura’s Oakley said that there is no real consensus in the market as to where the yuan trades next versus the dollar.
“This is simply due to the unpredictability of the trade negotiations and President Trump,” he said, adding the market is expecting the first phase of the agreement to be signed on Nov. 16.
“But no one would be truly shocked if talks were derailed before then,” Oakley added.
Together with other world leaders, Trump and Chinese President Xi Jinping are set to participate in the Asia-Pacific Economic Cooperation forum in Chile in mid-November. Many market-watchers are anticipating a partial trade deal to be signed between the two countries at that meeting.