China’s yuan edges up in narrow trade

China’s yuan edged up in narrow trade yesterday, with the market cautious ahead of US-China trade developments although implied volatility in the currency dropped to its lowest in 10 months.The yuan has been calm in recent sessions as investors refrained from betting on its direction before a solid outcome in talks between the United States and China.The two sides wrapped up the latest round of negotiations in Washington late last week and will be resuming discussions this week remotely. “The bilateral talks seem coming to an end soon.But before that, the yuan is likely to remain stable,” said a trader at a Chinese bank.Prior to market opening yesterday, the People’s Bank of China (PBoC) set the midpoint rate at 6.7142 per dollar, 59 pips or 0.09% firmer than the previous fix of 6.7201.In the spot market, onshore yuan opened at 6.7135 per dollar and was changing hands at 6.7145 at midday, 20 pips firmer than the previous late session close.Onshore spot yuan traded in a tight range of less than 60 pips yesterday and trading volume shrunk to $11.67bn, compared with a normal half-day volume of around $15bn.Rising optimism towards a deal to end the months-long trade war between the world’s two largest economies had reduced depreciation pressure on the yuan, traders said.The Chinese currency fell more than 5% in 2018 as a result of a tit-for-tat tariff battle with the United States, and signs of easing tensions have lifted its value by about 2.4% to the dollar so far this year.But a top White House official said on Monday that although progress had been made, US officials were “not satisfied yet” with all the issues standing in the way of a deal to end the US-China trade war. Implied volatility in yuan options, which gauges investors’ expectations for swings in the dollar against the yuan, continued to fall on Tuesday.The three-month contract eased to the lowest since June 14, 2018.Ken Cheung, senior Asian FX strategist at Mizuho Bank in Hong Kong warned that depreciation pressure on the yuan could pick up again if the final outcome of the trade negotiation disappoints the market.” As a whole, investors hold high expectation for reaching the final trade deal for now and any disappointment could sink the RMB to 6.9/7.0 area,” Cheung said in a note to clients. “In this sense, market participants refrain from adding long CNH or CNY positioning below 6.70 handle before striking the final deal, while are more aware of the downside risks involved.”