US-China trade optimism to help yuan overcome concerns over weakening economy

The Chinese yuan will hold on to its recent gains against the dollar, and likely make a modest push forward from current levels over the coming year, as optimism about a US-China trade deal offsets anxiety over weak domestic economic growth, a Reuters poll showed.
Having slumped about 6 percent versus the dollar in 2018, with analysts wagering in early January of a move towards 7 per dollar by mid-year, the yuan has defied pressure and gained around 2.5 percent this year. That rebound was largely driven by progress in trade talks between Washington and Beijing and the People's Bank of China (PBoC) setting consistently higher mid-point reference rates.
The yuan was expected to gain 0.6 percent to 6.66 per dollar in a year, from about 6.70 on Wednesday, according to the latest poll of over 60 foreign exchange strategists taken over the past week. That is a modest upgrade to last month's forecast.
"Trump's backing away from tariff escalation, previously implicit in our forecasts, means our USD/CNY projections have to be lower," noted Cliff Tan, East Asian head of global markets research at MUFG. Market watchers have shifted their attention to the latest round of negotiations being held in Washington after both sides cited progress in discussions in Beijing last week.
"There will be a currency component in any ultimate US-China trade deal and FX markets initially took that to mean USD/CNY has become a one-way bet - stronger yuan. But too strong a yuan may also make for awkward future currency diplomacy," Tan said. Expectations for a stronger yuan are also partly driven by changing fortunes for the dollar.
The dollar's outlook darkened after the Federal Reserve last month abandoned projections for further interest rate hikes this year on signs of an economic slowdown. That could help unwind last year's slide in emerging market currencies.
"The end of the Fed's tightening cycle now appears to be more clearly in sight, and indeed there is some risk it has already been reached. Overall, evolving Fed policy should become an increasing headwind for the US dollar, and an increasing tailwind for the renminbi," said Erik Nelson, currency strategist at Wells Fargo.
Forecasts in the latest poll showed a complete shift from a January survey when a majority of strategists had predicted the yuan to have breached or to trade at 7 per dollar by mid-year. In the latest poll analysts were mostly optimistic on the yuan and only four respondents still forecast it to reach 7 per dollar or weaker over the coming year, attributing that pessimism to an economic slowdown and more policy easing.
"We are extremely concerned about the ability of the Chinese economy to keep stimulating growth without a significant weakness in the value of the exchange rate," said Jane Foley, head of FX strategy at Rabobank who predicted the yuan to hit 7 per dollar rate by end-Sept.
"Trade deal might give some short-term celebration, but again in order to keep the economy growing at the sort of rate, that the government wants it to, then it is reasonable to assume that the yuan will slide below 7," said Foley, who was the most accurate foreign exchange forecaster on major currencies in Reuters polls last year.