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Effect of the US-China Partial Trade Agreement on Chinese Yuan (RMB)



Chinese Yuan Notes

Fred Dufour | AFP | Getty Images

The yuan will continue to trade above $ 7 per dollar even if the US and China manage to get a partial deal, experts say.

The Chinese currency, also known as the renminbi, has eased in recent months as trade tensions between Washington and Beijing intensified.

"The yuan will be stuck in a narrow area until we know for certain that Phase 1

of the trade agreement has been signed," Stuart Oakley, global head of foreign exchange in Nomura, told CNBC by email.

Earlier this month, the United States and China appeared to have reached some common ground during high-level trade negotiations in Washington. At the moment, a partial trade agreement is being drawn up between the two countries.

"I estimate the area will be 0.50% on either side of 7.0750 until November 16 – with a slight bias," he said, referring to next month's Asia-Pacific Economic Cooperation meeting, which will be attended by US President Donald Trump and China's President Xi Jinping. The currency pair will likely make the trip at 7 am if the two sides can sign a deal in Chile, he added.

Last week, the US side raised tariffs from 25% to 30% on $ 250 billion worth of Chinese products.

According to US officials, the new tariff rates would come into effect if no agreement is reached before the next deadline of December 15. Trump's top economic adviser Larry Kudlow told Fox Business Network on Monday that he sees the possibility that the tariff hikes in December will be taken by the board if the trade talks go well.

In order for the Chinese currency to strengthen to a level below 7-yuan per dollar again, the market would have to see signs that "eliminating existing tariffs is being seriously discussed," according to Oakley.

The yuan weakened past a psychologically significant level of $ 7 per dollar in August, prompting analysts to believe that if the United States continues to raise tariffs on Chinese goods, Beijing could allow its curb rency to weaken to help offset the effect of higher tariffs.

A weak currency makes a country's exports cheaper on international markets, and therefore more attractive.

Chinese Vice Premier Liu He, Beijing's main negotiator, said on Saturday that both sides have made "significant progress" in laying the groundwork for signing a phased deal, Reuters reported.

On Tuesday, the yuan exchanged land hands around 7.0721 per dollar. It has weakened 2.78% since August.

China maintains strict control over the exchange rate of the yuan on land traded on the mainland.

Optimism for trade diminishes

After announcing the breakthrough in the talks, the yuan strengthened from levels close to 7.11 to around $ 7.06 per dollar as markets cheered for the opportunity to ease trade tensions between the world's two largest economies.

Since then, however, some of the optimism among investors has faded.

"The risk premium from (a) customs abolition on October 15 has been reduced," Christy Tan, Head of Market Strategy and Research for Asia at National Australia Bank, told CNBC via email.

She said that the yuan move is closely linked to the progress of the partial trade agreement – China wants the US to remove any new tariffs and call back the previous ones. Tan said the bank predicts that the currency can mostly trade above 7.0 per dollar . "The downside risk to our forecast for the end of 2019 at 7.40 has increased with recent developments," she said.

Other experts described the interim agreement as "more like a truce without any real details."

Alicia Garcia Herrero and Jianwei Xu of the French investment bank Natixis explained that what has been released so far is a breakdown of old measures.

"The rest are all of China's vague promises to address America's concern for intellectual property," they said in a Thursday note adding the country's economic downturn did not "bode well for a strong currency."

Taking into account ongoing negotiations between the US and China on a written agreement, as well as China's declining domestic economy, they predict that the yuan could fall to $ 7.25 per dollar by the end of the year, and to 7.45 in over the next 12 months.

Nomuras Oakley said that there is no real consensus in the market about where the yuan is trading next dollar.

"This is simply due to the unpredictability of the trade negotiations and President Trump," he said, adding to the market, expecting the first phase of the deal to be signed on November 16.

"But no one would really be shocked if calls were intercepted before then," Oakley added.

Together with other world leaders, Trump and Chinese President Xi Jinping are eligible to participate in the Asia-Pacific Economic Cooperation Forum in Chile in mid-November. Many market participants expect a partial trade agreement to be signed between the two countries at this meeting.


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