SHANGHAI: China’s yuan consolidated near a 3-1/2-month low against the dollar on Thursday, as investors waited for more clues on US President-elect Donald Trump’s proposed policies that could affect the Chinese currency’s outlook.

The yuan has taken a hit since the US presidential election, weighed down by rising investor concerns about higher tariffs on Chinese goods and hostile trade relations between the world’s two largest economies over the next four years.

The central bank set a firmer-than-expected midpoint fixing, a practice it has continued since last Wednesday, with traders and analysts interpreting it as an official attempt to anchor market expectations and rein in yuan weakness.

Prior to the market opening on Thursday, the People’s Bank of China (PBOC) set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1934 per dollar, which was 548 pips firmer than Reuters’ estimate of 7.2482.

“While the potential US tariffs announcements will likely trigger another round of CNY sell-offs, it could be appropriate for the policy maker to stabilize the RMB market pre-emptively,” said Ken Cheung, chief Asia FX strategist at Mizuho Bank.

The central bank has been setting the official guidance rate in an extremely tight range on the firmer side of the psychologically important 7.2 per dollar level over the past week, which effectively put 7.34 as a floor for spot trades.

“An abrupt shift in the USD/CNY fix rate could quickly unsettle the market, particularly if it comes in above 7.20,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.

As of 0334 GMT, the onshore yuan was 0.06% higher at 7.2415 to the dollar, not far from a 3-1/2-month trough of 7.2476 hit last Thursday.

China’s yuan steady as dollar strength loses momentum

Its offshore counterpart traded at 7.2461 around the midday.

Currency traders said Trump’s pick for Treasury secretary could be the next market catalyst affecting the dollar and US Treasury yield movements, which would then influence other major currencies, including the yuan.

A Reuters poll of economists showed that the United States could impose nearly 40% tariffs on imports from China early next year, potentially slicing growth in the world’s second-biggest economy by up to 1 percentage point.

During Trump’s first term as president, the yuan weakened about 5% against the dollar after the initial round of US tariffs on Chinese goods in 2018, and fell another 1.5% a year later when trade tensions escalated.

As part of his pitch to boost American manufacturing during the recent election campaign, Trump said he would impose tariffs of 60% or more on goods from China.

The proposed tariffs, as well as other policies such as tax cuts, are seen as inflationary and likely to keep US interest rates relatively high, in a blow to currencies of trading partners.

“Our event studies from 2018-2019 show the sharpest FX moves have tended to occur after the tariff announcements with USD/CNY fairly steady in the run-up,” Goldman Sachs analysts said in a note this week.

“Whilst an over-shoot of 7.50 is possible, we note that a large currency depreciation could fuel further currency depreciation expectations promoting potential financial market instability.”

The analysts added they did not expect Chinese policymakers to allow the yuan to depreciate too much, but rather to shift towards more monetary and fiscal policy easing to offset the growth shock.

Chinese government advisers are recommending that Beijing should maintain an economic growth target of around 5.0% for next year, pushing for stronger fiscal stimulus to mitigate the impact of expected US tariff hikes on the country’s exports.