SHANGHAI: China’s yuan was steady on Monday as the dollar’s furious rally took a breather, while the Chinese central bank renewed its support through its regular market guidance and some signs of green shoots in the economy helped rein in the currency’s fall.
But traders believe the yuan’s weakness will extend into next year, when potentially higher US tariffs under Donald Trump’s presidency is expected to undercut China’s fragile economic recovery.
“The major downside risk now is obvious: Trump tariffs,” Gavekal Dragonomics economic Wei He said in a note to clients.
That prospect is already putting pressure on China’s currency and equity markets, and “the outlook is thus unusually uncertain.”
The yuan was fetching 7.2354 per dollar around midday, little changed from Friday’s close of 7.2288. It had slumped more than 3% against the dollar in a seven-week losing streak.
The dollar index, which had surged after Trump’s election victory fueled bets on higher US inflation, took a breather on Friday and early in Asia on Monday.
“I think further near-term consolidation near the 2-year range highs of the dollar index is likely before a breakout to higher ground,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.
China’s yuan firmer against dollar
He also attributed the yuan’s calmness in recent days to the re-emergence last week of the People’s Bank of China’s (PBOC) counter-cyclical factor, designed to prevent the currency from sharp falls or gains.
The PBOC set the yuan’s midpoint at 7.1907 per dollar on Monday, 405 pips stronger than the Reuters estimate.
The last time the guidance came in firmer than Reuters estimate was in early August.
The yuan was also bolstered by October data showing improvement in China’s retail sales.
But analysts see the economic rebound as fragile and short-lived, as China faces heightened trade tensions.
Goldman Sachs expects China’s exports to fall 0.9% next year in nominal dollar terms, mostly due to higher tariffs.
“The tariff impacts should however be partially offset by domestic easing and currency depreciation,” Goldman said, expecting the yuan to weaken to 7.50 per dollar by the end of 2025.