China’s Yuan climbs past key levels as trade tensions ease

The currency on Tuesday touched its highest since July in the offshore market, after punching through 6.9 per dollar for the first time in more than five months on Monday. The latest leg up came from news of the Trump administration removing China from its designation as a currency manipulator.

China’s currency has now recouped about a third of the losses it sustained against the dollar since mid-June 2018, when U.S.-China trade tensions soared as President Donald Trump pressed ahead with waves of tariff hikes. The exchange rate has also benefited lately from rising confidence that China has arrested an economic slowdown.

Some now predict the currency will touch 6.8 per dollar within three months—a level not seen since May last year.

“Having a stronger currency is one way to show good will,” said Mitul Kotecha, a senior emerging-markets strategist at Toronto-Dominion Bank in Singapore. “Signs of a gradual, as opposed to rapid, slowdown in China’s economy and limited decline in China rates will provide support to the currency.”

With Chinese Vice Premier Liu He expected to seal the partial Sino-American trade deal in Washington Wednesday, the Trump administration said Monday China had made “enforceable commitments” not to devalue the yuan and had agreed to publish exchange-rate information. The U.S. Treasury still kept China on a monitoring list for foreign-exchange practices.

The yuan has also been advancing more broadly, climbing the past four sessions against a basket of trading partners’ currencies. The strengthening has helped bolster sentiment in stocks, with the CSI 300 Index closing at its highest level in almost two years Monday. Shares of Chinese companies also surged in Hong Kong.

China’s currency weakened past the key 7 per dollar level for the first time in a decade in August, when tensions between the two nations escalated. The yuan’s slide last year reignited one of Trump’s favorite criticisms of China: that Beijing weakens its currency to aid exporters.

Now, investor optimism over the economy and trade has kept the currency on the strong side of 7 for more than two weeks. With technical indicators flashing bullish signals, multiple measures of expected volatility are hovering near their lowest in about five months, signaling a reluctance among traders to hedge against swings. The yuan has gained more than 4% since September’s nadir.

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Some yuan watchers are advising caution. Cliff Tan, head of global markets research for East Asia at MUFG Bank Ltd., says expectations of fiscal stimulus may be running too high. Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd., says the yuan’s strength is temporary, as it’s partly related to corporate spending and exporter conversion before the Lunar New Year.

Analysts started revising their 2020 forecasts for the yuan last month, following news that Beijing and Washington reached an agreement. Evidence that a slowdown in the world’s second-largest economy may not be as bad as feared has also helped, with recent data showing that China’s manufacturing sector continued to expand in December.

Expectations that authorities will add to policies supporting growth—while staying clear of large-scale monetary stimulus—are also boosting sentiment for the yuan.

The median forecast of analysts surveyed by Bloomberg is for the yuan to end 2020 at 6.95.

“The yuan’s outperformance since last week has reflected the improving risk sentiment, thanks to signs of the economy bottoming out,” said Tommy Xie, an economist at Oversea-Chinese Banking. “There’s some speculation that China may get a better trade deal than expected.”