US-China Trade Tensions Drive Offshore Yuan Lower

As trade tensions between the world's two largest economies escalate, the offshore yuan has depreciated, dragging down its regional peers.

Following retaliatory tariffs imposed by both China and the US, the offshore yuan has declined by 0.3%. Currency markets sensitive to China's growth, including the Australian and New Zealand dollars, have fallen sharply.

China's imposition of tariffs on US imports and antitrust probe into Google highlights the intensifying trade dispute. This move has fueled concerns about China's recovery, already burdened by a housing crisis and weak consumption.

Investor confidence in riskier assets in Asia Pacific has declined as China has been a key driver of economic stability and growth in the region. On Tuesday, the Hang Seng China Enterprises index trimmed its gains in Hong Kong, falling from nearly 4% in morning trading to 1.3%. Other Asian currencies, including the Thai baht and Indonesian rupiah, have also pared their gains.

"Unsurprisingly, risk aversion has taken hold in markets, with the yuan weakening and its impact spilling over into other Asian currencies," said Khoon Goh of ANZ Banking Group.

Currency traders are closely watching the daily reference rate for the yuan on Wednesday. Some speculate that China may loosen its currency peg if Trump's tariffs take effect.

Global markets have been volatile since Trump's election, with the US dollar reaching multi-year highs against the Australian dollar, New Zealand dollar, and yuan. Despite recent gains, Wall Street banks remain bullish on the greenback amid market uncertainty.

Although Trump has reached agreements to delay tariffs with Mexico and Canada, there remain hopes that he may adopt a less aggressive stance towards China. On Tuesday, Trump indicated that his administration plans to engage with China, potentially offering a reprieve from the tariffs.