SHANGHAI: China’s yuan jumped to a six-month high against the dollar on Tuesday, breaching a key threshold, after Beijing and Washington agreed to pause their trade war while the central bank also lent support through its official guidance rate.
The deal inked between US and Chinese officials after weekend talks in Geneva surpassed market expectations, as both sides agreed to drastically unwind most of the tariffs imposed on each other’s goods since early April.
The dollar rose broadly on the back of a boost to sentiment as risks of a US recession receded and reduced the need for a near-term rate cut by the Federal Reserve.
The economic dividend of a potentially durable trade deal also propelled the Chinese currency past the key 7.2 per dollar level in both onshore and offshore trades to levels last seen in November.
“The substantial progress made in US-China trade talk gave markets more than what it needs to cheer,” analysts at OCBC Bank said in a note.
“This de-escalation does not equate to a full return to normalcy,” they said, noting the trajectory of the bilateral trade tension over the next 90 days and beyond will be dependent on the progress of direct US-China negotiations and how both sides “engage third-party countries and trade blocs through broader consultations coalition-building.”
As of 0211 GMT, the onshore yuan rose to a high of 7.1855 per dollar, the strongest level since November 11, before trading at 7.1902 around midday, 0.24% higher than the previous late night close.
Its offshore counterpart followed suit to scale a six-month high of 7.1791 before last changing hands at 7.1839.
Prior to market opening, the People’s Bank of China (PBOC) lifted its official midpoint fixing to a level firmer than the psychologically important 7.2 per dollar for the first time in more than a month.
It set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1991 per dollar, its strongest since April 7 and 189 pips firmer than a Reuters’ estimate.
The central bank’s midpoint fixing is monitored closely by markets as they are viewed as a signal of official’s stance on foreign exchange policy.
“Part of the yuan strength on Tuesday was led by a breach of the key 7.2 per dollar level in the fixing, which was a nod to further rises,” said a trader at a foreign bank.
Still, some analysts argued that a too-strong Chinese currency could prompt exporters to settle their dollar deposits and trigger even sharper gains.
“We maintain our view that the PBOC prefers to keep the yuan from appreciating too much against the dollar,” said Ju Wang, head of Greater China FX & rates strategy at BNP Paribas.
