Yuan nears critical juncture as trade talks loom

By BLOOMBERG

HONG KONG • The yuan is entering a critical period after posting its second-best monthly advance ever, with analysts sounding caution as a new round of China-US trade talks gets underway.

The Chinese currency could head to seven per dollar if there’s a breakdown in the negotiations, while an agreement on no additional tariffs will send it on a sustained rally, Citigroup Inc said. An extension of the trade truce with little meaningful progress on underlying issues may disappoint and pressure the yuan, Bank of America Merrill Lynch strategists led by Adarsh Sinha wrote on Feb 11.

It’s been a roller coaster for the yuan this year: The currency surged 2.6% in January on the back of a sliding dollar and then gave up about half those gains in just two sessions. Chinese VP Liu He will join US Treasury Secretary Steven Mnuchin for trade talks in Beijing later this week, before a possible meeting between presidents of the two nations soon. US President Donald Trump said the March 1 deadline to raise tariffs on Chinese products may be extended if the sides are near a deal.

“The yuan has been tracking the dollar as it’s not the best time to place large long or short bets on the currency due to uncertainty over the trade talks,” said Carie Li, an economist at OCBC Wing Hang Bank Ltd in Hong Kong. “The yuan may advance if a partial deal is reached. But in the coming two to three months, it will trade between 6.7 and 6.9 because of weaker fundamentals and narrowing China-US rate differentials.”

The currency’s recent rally was a “false dawn”, and it will slide to seven by the end of this year amid slower growth and policy easing, according to Deutsche Bank AG. Bloomberg Economics expects the yuan to be buffeted by a range of forces this year, including the trade war and an uncertain outlook, and that heightened volatility could mean downward pressure prevails with big swings likely. The yuan is “in for a bumpy ride this year”, economists wrote.

The yuan rose 0.16% to 6.7610 per dollar as of 4:57pm yesterday in Shanghai. The currency lost 1.4% the first two sessions of February. The offshore yuan last traded at 6.7700. — Bloomberg