Yuan weakens as trade tensions, easing pressures persist

HONG KONG: The yuan dropped against the dollar on Monday as the United States kept up pressure on China in their bitter trade dispute and as expectations grew that China's central bank could cut lending rates to combat weakening economic growth.

The yuan had made gains late Friday after US President Donald Trump softened his tone on the trade war, saying that he "may not have to" ramp up tariffs next year, but lost most of that ground following Vice President Mike Pence's comments targeting China at the weekend.

Attending the Asia Pacific Economic Co-operation (APEC) meeting in Papua New Guinea, Pence warned that there would be no let up in Washington's tariffs until China changed its trade practices.

The spot yuan finished the onshore trading session Monday at 6.9429, 78 pips weaker than the previous late session close. This was despite the People's Bank of China setting its daily yuan midpoint at 6.9245 per dollar prior to market open, firmer than the previous fix of 6.9377.

"The development in US-China trade frictions will be the main driver impacting the path of USD/CNY and USD/CNH," Stephen Chiu, an analyst at China Construction Bank (Asia) in Hong Kong, wrote in a memo on Monday, noting that Pence's comments at APEC would will likely keep the yuan weak at the start of the week.

However, with the direction of the trade talks still unclear, the pace of that depreciation will be mild, said a Shanghai-based trader with a foreign bank.

"We don't expect a lot of volatility ahead of the US-China dialogue," he said, referring to the scheduled meeting between Trump and Chinese President Xi Jinping at the G20 summit in Argentina later this month.

Also putting pressure on the yuan is speculation that the People's Bank of China (PBOC) could cut benchmark lending rates for the first time in three years, amid weak credit growth and sluggish economic performance.

"The rapid decline of onshore yields as a result of further easing expectation due to weak credit data may also limit the renminbi's upside," Tommy Xie, the Singapore-based head of Greater China Research at OCBC Bank, wrote in a note on Monday.

The dollar had softened across the board on Friday after Federal Reserve policymakers raised concerns over a slowing global economy, even as they signaled more interest rate hikes ahead. But markets believe the tightening cycle could end sooner than previously expected.

The global dollar index fell to 96.392 on Monday from the previous close of 96.465.

As the yuan drew near the 7 per dollar level in recent sessions, state-owned banks were seen selling dollars and buying the Chinese currency.

Official US data released over the weekend, which showed China sold the most Treasuries in nearly two years in September, appeared to reflect Chinese authorities' determination to guard the red line.

But the Shanghai-based trader said China's policy may be more nuanced than the data suggests.

"Reserves exist in many forms," said the trader. While Chinese authorities 'sell' US Treasuries, they may allocate dollar asset elsewhere. It's not necessarily that straight forward."

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 92.78, weaker than the previous day's 92.79.

The offshore yuan was trading 0.09 percent away from the onshore spot at 6.937 per dollar.