SHANGHAI: China's yuan slipped from a near two-month high against the dollar in holiday-thinned trading on Monday, as US President Donald Trump's retaliatory plan against Colombia rekindled broader fears of US tariffs against key trading partners.
Uncertainty around US trade policy with China and signs of a slowing domestic economy, highlighted by an unexpected contraction in manufacturing activity in January, are likely to check any upside moves in the yuan, traders and analysts said.
In a note to clients, analysts at Goldman Sachs said they expect "China tariffs to be raised later than previously," adding that they "assume implementation in the second quarter with the risks towards a longer standoff."
As of 0327 GMT, the onshore yuan was 0.33% lower at 7.2621 to the dollar, compared with a high of 7.2363 hit in the previous session on Friday that was the strongest level since Nov. 29.
If the spot rate finishes the late night session at the midday level, it would have gained 0.5% to the dollar in January to record the first monthly rise since September.
Yuan surges to 1-1/2 month high
That monthly momentum has been underpinned by Trump's apparent softening in threats of tariffs on Chinese exports and after his "friendly" recent conversation with Chinese President Xi Jinping.
In offshore trade, the yuan was at 7.2641, down about 0.25%. Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1698 per dollar, and 597 pips firmer than a Reuters' estimate of 7.2295.
"Trading on the last day before the holiday was very slow," said a trader at a foreign bank.
Chinese financial markets will be closed for the week-long Lunar New Year holidays from Tuesday, and trading will resume on Feb. 5.
Some traders said they would hold very light positions for the long holiday in anticipation of higher volatility in overseas markets, while keeping a close eye on how Trump implements this trade policy.
The US and Colombia lurched toward a trade war on Sunday as Trump threatened tariffs and sanctions on the country to punish it for turning away military aircraft carrying migrants being deported as part of his immigration crackdown.
Separately, China's manufacturing activity unexpectedly contracted in January, an official factory survey showed on Monday, its weakest since August, keeping alive calls for more stimulus in the world's second-largest economy.
"Year-to-date, the PBOC seems to be opting for yuan stability at the cost of somewhat constrained monetary easing," analysts at Morgan Stanley said in a note.
"Modest rate cuts and yuan depreciation are still in sight this year ... we expect the PBOC to cut the policy rate by 15 basis points in the first quarter and 10 basis points in the third quarter."
They maintained their view of modest yuan depreciation to partially absorb the tariff shock, expecting the onshore yuan to reach 7.60 by year-end.
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