Currency Traders Await China's Yuan Fixing Amid Tariff Tensions

Currency traders are eagerly anticipating China's next daily reference rate for the yuan amid escalating trade tensions between China and the United States. Expectations vary, with some analysts predicting a relaxation in the government's grip on the currency if Donald Trump's tariffs are implemented.

Weaker Yuan Anticipated

Australia & New Zealand Banking Group (ANZ) and Malayan Banking Bhd. (Maybank) anticipate the People's Bank of China (PBOC) may set the fixing weaker than 7.2 yuan per US dollar. ANZ even predicts a breach of this level this week. Since Trump's election victory in November 2016, the PBOC has maintained a firm grip on the yuan's exchange rate, preventing it from weakening significantly.

Counteracting Tariffs

Some analysts argue that a weaker yuan is necessary to mitigate the impact of higher US tariffs, despite the potential for capital outflows. Goldman Sachs expects the fixing to gradually approach 7.3 yuan per US dollar.

"The yuan will need to play a buffer role to offset the shock of tariffs," said Khoon Goh, head of Asia research at ANZ. "This will have wider spillover effects on other Asian currencies and could lead to pressure on regional assets due to portfolio outflows."

PBOC's Intentions

The PBOC's intentions will become evident on Wednesday when mainland markets reopen. The Bloomberg dollar index has risen consistently since January 27, when China last traded before the Lunar New Year holiday. The fixing limits fluctuations in the onshore yuan to within a 2% range either side.

Offshore Yuan Weakening

Following Trump's 10% tariff announcement on China over the weekend, the offshore yuan weakened by 0.7% to 7.3734 yuan per US dollar, reaching its lowest point since October 2022. It has since recovered some losses as Trump indicated that the US is willing to negotiate on tariffs.

Trade War Concerns

While a 10% tariff is less severe than the 60% threatened by Trump during his campaign, the prospect of a trade war is still casting a shadow over China's economic outlook. Exports have been a bright spot amid sluggish domestic demand.

Potential for Volatility

"In the past trade war, China allowed the yuan to depreciate," said Fiona Lim, a senior strategist at Maybank. "We expect a similar move this time." She believes the PBOC may allow the fixing to weaken past 7.20 yuan per US dollar this month.

Despite expectations of further yuan weakness, some analysts highlight the PBOC's commitment to currency stability. The Wall Street Journal reported that part of China's response to US tariffs will be a renewed pledge not to devalue the yuan for competitive advantage.

Risk of Additional Tariffs

Trump's repeated threats to impose additional tariffs could continue to put pressure on the yuan. "The market will factor in a risk premium for potential additional tariffs," wrote Goldman Sachs analysts led by Andrew Tilton. The bank forecasts the onshore yuan could reach 7.4 to 7.5 yuan per US dollar if Beijing allows a weaker fixing.