China’s yuan is unlikely to escape its current bout of weakness, even with help from U.S. Treasury Secretary Janet Yellen.
While Yellen’s decision not to name China as a currency manipulator removes a flash point, analysts say that tension between the two countries have moved to strategic issues such as technology leadership. The yuan is also weighed down by other factors including slowing capital flows and a narrowing yield spread with the dollar.
“It takes away one source of pressure, but other areas of tensions with the US remain,” said Dariusz Kowalczyk, chief China economist at Credit Agricole CIB. “The headline will likely provide only temporary support, given that other factors are in the driver’s seat for now.”
The semiannual US foreign-exchange report is expected this month. Here are more views on the development:
Tariffs Remain
“Since the trade war, I think the semiannual report is no longer so important,” said Tommy Xie, head of Greater China research at Oversea-Chinese Banking Corp. The US still has tariffs placed on China that have already kicked in and are unlikely to be lifted in the near term, he said.
“Things are still overshadowed by the upcoming US bill on strategic competition, which will be considered on April 21,” he said. “The capital flow picture will be one of the main drivers of the yuan in the near term as well as dollar trajectory.”
Less Confrontation
“The tag was announced the previous time due to political tensions even though China didn’t meet the criteria of a currency manipulator,” said Xing Zhaopeng, senior China strategist at Australia & New Zealand Banking Group Ltd. “It doesn’t make sense for the US to keep challenging China on the issue of foreign exchange unilaterally, rather the U.S. is showing it prefers to address individual topics separately rather than a full-scale confrontation. The currency problem is no longer a core issue of US-China relations.”
“It shows that interaction between China and the US is becoming more rational and more compliant with market rules, which is good for yuan in the short-term,” said Ji Tianhe, head of FXLM strategy at BNP Paribas SA in Beijing. “But it doesn’t affect the overall trend in the second and third quarters. This can be read as the currency exchange-rate issue is no longer the core issue of the Sino-US conflict.”
No Positive Effect
Tensions only add pressure on the yuan if they flare up but won’t positively influence the currency if they simmer, according to Gao Qi, a currency strategist at Scotiabank. “The yuan is likely to range-trade while following a broad dollar movement as US-China tensions stay under control for now,” he said.
“Meanwhile, a forming golden cross may indicate some upside potential for” USD/CNH, he said, referring to the 50-day moving average indicator rising over the 100-day moving average.
Pressure From Yields
“The yuan is under pressure due to the higher Treasury yields -- we have calculated that renminbi spot is the most correlated currency in the world with the level of the 10-year UST yield, and we continue to expect the yield to trend higher,” Kowalczyk said.
“The yuan is also suffering from a decline in foreign interest in Chinese bonds, and CGBs in particular. We expect foreign inflows to be much lower this and next year than what we had anticipated,” due to FTSE Russell’s decision to extend the inclusion of Chinese bonds to a three-year period from 12 months, he said.
