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Uptrend Intact As Fed Remains In Accommodative Mode; Tariffs A Risk
China's yuan will likely hold its modest uptrend against the U.S. dollar, helped by an extremely accommodative Federal Reserve, although there is little sign of a significant break out of current narrow trading ranges in the near-term, policy advisors and FX analysts told MNI.
Easy Fed policy will weigh on the dollar for the foreseeable future, while the People's Bank of China is moving to a more neutral stance, with the yield spread between the two countries continuing to favour the yuan, said Xiao Lisheng, deputy director of the International Finance Department at the Institute of World Economics and Politics, attached to the Chinese Academy of Social Sciences.
Other factors in the yuan's favour include the rapid post-Covid recovery seen in China and, at least according to Xiao, it has been undervalued in recent years as the trade dispute with Washington raged. According to Xiao, if the current trade disputes were discounted, the yuan could be around 5% above its current levels, close to CNY6.75.
Xiao believes the pair could strengthen to CNY6.85 at some point this year from the current level around CNY6.95. However, he thinks any escalation in the trade dispute between the two will see the yuan back at the 7 level in fairly short order.
Li Liuyang, chief foreign exchange analyst at China Merchants Bank, notes the a possibility fresh tariffs, currently an unpriced risk, but highlighted in the last 24 hours as Washington slapped tariffs on Canadian aluminium just months after signing the USMCA trade deal.
Despite the potential for a volatile few months, Li doesn't see the yuan breaking far from current levels, although he does have an upside level for the yuan of CNY6.80 in his CNY6.80 to 7.10 range.
According to Xiao, the yuan's current performance is comfortable for the PBOC, with no overriding sentiment to go short or long the yuan, with the rate reflecting underlying fundamentals.
For the economy, few, see the yuan strengthening against the dollar as an issue, as the currency has been little changed against a broader basket of currencies, therefor not weighing too heavily on exports.
Guan Tao, former director of international payments at China's State Administration of Foreign Exchange, said what influences export competitiveness are multilateral exchange rates, not a single rate.
Even when the yuan appreciates against dollar, the wider yuan index would remain steady as the dollar index falls, said Guan, now chief global economist at BOC International (China) Co Ltd.
But Guan suggested that both importers and exporters should diversify the currencies they use for pricing and settlement to spread risks, with, 90% of all transactions in the first 6 months of this year currently in dollars.
Xiao said the effective exchange rate of the yuan has been actually depreciating this year, benefitting exports.
Tan Yaling, head of the China Forex Investment Research Institute, said exports orders have been unexpectedly robust since June according to her survey, with the indoor entertainment, fitness and leisure products popular.
She predicted the yuan would close at 6.98-7.02 level at the end of the year, compared with a closing price of 6.9662 on Dec 31.
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