CURRENCY traders are waiting with bated breath for China’s next daily reference rate for the yuan, with some expecting authorities to relax their tight grip, if Donald Trump’s tariffs go into effect.
The People’s Bank of China (PBOC) may set the so-called fixing weaker than 7.2 per US dollar, according to Australia & New Zealand Banking Group and Malayan Banking, with the former expecting a breach this week. The level has been tightly guarded by the PBOC since November, when Trump’s election win spurred the managed currency’s slide.
A surging US dollar is making it difficult for authorities to prop up the yuan after months of efforts to stabilise it using a range of tools. Some analysts believe a weaker yuan is necessary to offset the impact of higher tariffs, even if the move spurs capital outflows. Goldman Sachs expects the fixing to gradually drift higher towards 7.3.
“Some adjustment for the yuan will be required as the currency needs to play a shock absorber role,” said Khoon Goh, head of Asia research at ANZ Banking Group. “There will be broader spillover effects on other Asian currencies, and the region’s assets may come under pressure from near-term portfolio outflows.”
The PBOC will show its intentions on Wednesday (Feb 5) when mainland markets reopen. The Bloomberg dollar index has risen in all but one session since Jan 27, when China last traded before the Chinese New Year holiday. The fixing limits the moves in the onshore yuan by 2 per cent on either side.
The offshore unit weakened as much as 0.7 per cent to 7.3734 on Monday following Trump’s 10 per cent tariff announcement on China over the weekend, reaching its lowest since October 2022. It has since recouped the losses as Trump said the US will speak to China regarding tariffs, adding that levies will be substantial if no deal is reached.
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While a 10 per cent levy is better than the 60 per cent threatened by Trump during his campaign trail, the spectre of a trade war further dims China’s outlook, as exports have been a rare bright spot amid sluggish domestic demand.
The yuan may see big swings if the two sides reach a last-minute agreement. Trump said he’s delaying 25 per cent tariffs on Canada and Mexico for a month after both US neighbours agreed to take tougher border control measures, leading to a rebound in their currencies.
Further weakness
“In the last trade war, China has allowed some depreciation in the yuan and this time, we do expect the same to happen,” said Fiona Lim, a senior strategist at Malayan Banking. The PBOC may allow the fixing to weaken past 7.20 within this month, she added.
Lim and ANZ’s Goh spoke before Trump reached a deal with Canada and Mexico.
While expectations for further yuan weakness are rife, some analysts say the PBOC’s focus on currency stability will put a floor on the slide. The Wall Street Journal reported on Monday that part of China’s response to US tariffs would include a renewed pledge not to devalue the yuan to gain competitive advantage, citing sources familiar with Beijing’s thinking.
Beijing may also be wary of further drawing Trump’s ire by engineering yuan weakness. The US president labelled China a currency manipulator during his first term.
“Tariffs at 10 per cent aren’t too damaging, and the PBOC will want to calm the market, so it will try to engineer a gradual depreciation,” said Alvin Tan, a strategist at RBC Capital Markets in Singapore.
Yet, the risk of further tariffs from Trump may keep the pressure on the yuan.
“The market will price in some uncertainty or risk premium of additional tariffs from here – sustaining upside pressure on USD/CNY,” Goldman Sachs analysts led by Andrew Tilton wrote in a Monday note.
The bank forecasts the onshore yuan to reach 7.4 to 7.5 as Beijing may allow a weaker fixing. That indicates as much as a 3.4 per cent drop in the onshore unit from its last close at 7.2535. BLOOMBERG
