China’s yuan inched lower yesterday as broad weakness in the greenback prompted corporate buying interest, but traders believe caution ahead of the upcoming G20 meeting in Japan later this month will keep further losses in check.
Investors are waiting to see if the leaders of China and the United States will meet to discuss trade issues on the sidelines of the G20 gathering after a recent escalation in the two sides’ dispute rattled global markets.
Reflecting growing pressure, the yuan gave up the last of its 2019 gains yesterday on a trade-weighted basis and moved into negative territory against a basket of currencies of China’s trading partners, according to Reuters calculations based on official data from the China Foreign Exchange Trade System (CFETS). Reuters estimated the index had fallen to 93.18 yesterday, compared with 93.28 at end-2018.
The index is only published on a weekly and monthly basis by the CFETS platform.
Prior to the market opening yesterday, the People’s Bank of China (PBoC) set the midpoint rate at 6.8903 per dollar, 81 pips or 0.12% weaker than the previous fix of 6.8822.
In the spot market, onshore yuan opened at 6.9080 per dollar and was changing hands at 6.9120 yesterday, 37 pips weaker than the previous late session close.
It has now slipped 0.6% against the dollar so far this year. The yuan traded in a very narrow range of less than 70 pips in the morning, while trading volume shrunk to $9.961bn, down from a normal half-day volume of about $15bn.
Officials at US Federal Reserve hinted on Tuesday at the possibility of an interest rate cut in the face of rising risks to trade and global growth.
Traders in China said their corporate clients quickly took advantage and loaded up on the weaker dollar.
The global dollar index fell to 97.051 at midday, not far away from a seven-week low of 96.995 hit in the previous session. But market participants believe uncertainties over trade will keep the yuan confined to a tight range in the near term.
US Treasury Secretary Steven Mnuchin is scheduled to meet People’s Bank of China Governor Yi Gang this weekend at a gathering of G20 finance leaders, marking the first face-to-face discussion between key US and Chinese trade negotiators in nearly a month.
But it remains unclear whether US President Donald Trump and his counterpart Xi Jinping will discuss trade at the G20 leaders summit later this month. “The trade war remains the key theme in the global market, and the market seems to gradually accept that the standoff between China and the US could be lasting for years, if not decades,” analysts at Commerzbank said in a note.”
The implications on FX market will be a bit complex — but as long as the Chinese growth could hold up, a risk of a rapid CNY depreciation can be largely discounted.
However, over the short term, CNY remains well supported by the Chinese central bank as well as a seemingly weakening dollar.” The intensifying trade dispute between the world’s two largest economies has piled pressure on the yuan since April last year.
With the yuan approaching the psychologically critical 7 per dollar mark, which was last seen in the global financial crisis, markets are waiting to see whether Beijing will firmly defend the key level.
Hu Yifan, regional chief investment officer and chief China economist at UBS Global Wealth Management, said 7 per dollar is not a floor for the yuan. “In domestic market, there remains huge room for (policy) adjustments. 
As long as the Sino-US trade negotiation continues, chances for the yuan to breach 7 are very little.
But if the trade talks fall through, yuan is likely to weaken past 7 very soon,” she told a conference in Shanghai on Tuesday.
“The yuan crossing the 7 mark or not is a key indicator showing if the negotiation goes on.” The offshore yuan was trading at 6.9287 per dollar yesterday.