SHANGHAI: China’s yuan weakened against the dollar on Tuesday, the first trading session after the holiday, as investors cautiously awaited fresh developments in the Sino-U.S. relations following some signs of a re-escalation of tensions.
U.S. President Donald Trump and Chinese leader Xi Jinping will likely speak this week, the White House said on Monday, and market participants will be closely monitoring the outcome after Trump accused China of violating an agreement to roll back tariffs and trade restrictions.
“The yuan is likely to swing in a thin range before the talk as heightened trade tensions should hurt both of the world’s two largest economies,” said a trader at a Chinese bank.
As of 0351 GMT, the onshore yuan was 0.02% lower at 7.1974 per dollar, while its offshore counterpart traded at 7.1994.
Prior to the market open, the People’s Bank of China (PBOC) set the midpoint rate at 7.1869 per dollar, and 3 pips firmer than a Reuters’ estimate of 7.1872. The spot yuan is allowed to trade 2% either side of the fixed midpoint each day.
China’s yuan looks set for monthly rise
Recent broad dollar weakness has allowed the central bank to gradually close the gap between its official guidance and market projections. The PBOC had set persistently firmer-than-expected midpoint settings since November to keep the yuan stable and prevent excess weakness.
However, FX analysts at Barclays said the PBOC was in “a difficult situation now.”
“On the one hand, daily USD/CNY fixings suggest no intention to drive the exchange rate significantly below 7.20, likely on the back of concerns of potential large repatriation flows from exporters,” they said in a note.
“On the other hand, a greater than 5% decline in CFETS within five months may be too fast and a further dip below 95 could fuel concerns or even some hostility from other Asian trading partners.”
Based on Tuesday’s midpoint fixing, the yuan’s value against its major trading partners, as measured by CFETS index, eased to 95.79, and down 5.6% year-to-date, according to Reuters calculations based on official data.
The onshore yuan has gained about 1.4% to the dollar during the same period.
Traders and analysts noted seasonal foreign exchange demand would kick in to pressure the yuan soon. Overseas-listed Chinese companies usually have higher foreign exchange needs to make dividend payments to their shareholders between May and August.
Separately, markets were little swayed by manufacturing activity data, which contracted last month, based on both official and private surveys.
On the macro front, investors will switch their attention to trade data due on June 9, seeking more clues from export figures and getting a clearer picture of the health of the economy.
The Hong Kong dollar eased to 7.8450 per U.S. dollar on Tuesday, a level not seen since September 2023 and not too far from testing the weaker end of its trading band.
The Hong Kong dollar’s weakness reflected loose cash conditions, with overnight HKD Hong Kong Interbank Offered Rate (HIBOR), a key barometer of liquidity conditions, hitting record lows. It was last fixed at 0.02027% on Tuesday.
