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Recent trade hope gains likely fleeting for China's yuan: Reuters poll

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By Reuters
Recent trade hope gains likely fleeting for China's yuan: Reuters poll
FILE PHOTO: A 100 yuan banknote (R) is placed next to a $100 banknote in this picture illustration taken in Beijing November 7, 2010. REUTERS/Petar Kujundzic/File Photo   -   Copyright  Petar Kudjundzic(Reuters)

By Vivek Mishra

BENGALURU (Reuters) – The yuan will shed recent gains made amid hopes for a “phase one” U.S.-China trade deal, according to strategists in a Reuters poll who predicted a weakening domestic economy would likely dampen the currency in the year ahead.

Talk of a possible preliminary deal lifted the tightly-managed currency to a 2-1/2-month high on Tuesday despite weak domestic data and the People’s Bank of China (PBOC) lowering its lending rate for the first time since early 2016.

The yuan broke through the key psychological 7 per dollar rate to touch 6.9876, its strongest since Aug. 2.

But a majority of strategists polled Nov. 1-6 cautioned that the recent strength won’t last in the absence of a broader deal rolling back existing tariffs imposed on China.

That trade feud with the United States has already hurt the Chinese economy. The latest official data show a slowdown in third quarter GDP growth to a near three-decade low, as the bruising U.S. trade war hit factory production.

“This (strength) does not mean the yuan would stay under the 7-level for a sustained period of time,” said Saktiandi Supaat, head of FX research for Maybank in Singapore.

“A shift of focus back to the reality of weakening growth momentum after the deal, as well as the realization subsequent phases of the deal could be harder to achieve, may check renminbi gains and see a return back to trades above the 7 (rate).”

The latest poll of over 50 currency strategists predicted the yuan <CNY=CFXS> weakening about 2% to 7.15 per dollar in six months and trading at 7.10 per dollar by this time next year from around 7 per dollar on Wednesday. Still, the 12-month ahead median for the yuan was the most optimistic outlook in Reuters polls since August, when the U.S. Treasury labelled China a currency manipulator.

Beijing and Washington have been locked in a trade feud for 16 months, but hopes have risen that an initial deal may be signed soon, despite the fact no talks have been scheduled. But doubts continue over the sustainability of any agreement.

If that fails, nearly all Chinese goods imported into the United States – worth more than $500 billion – could be subjected to tariffs, potentially weakening the yuan 1.4-3.0%, strategists who answered an additional question said.

“The effect of the deal will be more lasting if talks continue to make progress, but we are skeptical about whether a full resolution can be reached any time soon,” said Irene Cheung, senior strategist for Asia at ANZ.

Respondents in the poll also said the yuan would gain 1-2% in the immediate aftermath if the United States and China sign a partial trade deal.

The PBOC has recently changed course by strengthening the yuan over 1% after in August allowing it to fall to its weakest rate since the 2008 global recession.

On Wednesday, the PBOC set the midpoint rate <CNY=PBOC> at 7.0080 per dollar – the strongest since Aug. 8.

That move by the central bank suggests Beijing is trying for a temporary freeze on the trade war, which is clearly hurting both economies. “An early sign of good faith in that regard is obviously the PBOC keeping CNY strong,” said Michael Every, head of financial markets research at Rabobank.

Rabobank has the most pessimistic forecast for the yuan – 7.75 per dollar in 12 months – a view held since August.

“It doesn’t hurt China to do that if it also sends a signal that all is well and there are no U.S. dollar shortage issues.” (Other stories from the global foreign exchange poll:)

(Polling by Shaloo Shrivastava; Editing by Mark Heinrich)