Yuan Recovers Slightly on Back of More Optimistic Outlook of China-US Trade Talks

Alan Penny

14 May 2019

3 min read

Yuan recovers

The yuan experienced a bit of a rollercoaster ride at the start of this week on the back of escalating tensions in the US-China trade talks. Monday saw the yuan hit its lowest point against the USD since December. Tuesday, though, the yuan recovered slightly on the back of a somewhat more optimistic outlook of the US-China trade talks.

Tariff Battle Forced the Yuan Down at the Start of the Week

On Monday, the Chinese yuan hit a five-month low against the U.S. dollar as the U.S. raised tariffs on Chinese goods and China threatened retaliation.

Thus, China stated they would be raising tariffs on a variety of imports from the U.S. worth $60 billion. The announcement came after the U.S. stated, on Friday, they would be hiking tariffs on $200 billion’s worth of Chinese goods.

The U.S. decision came after President Donald Trump stated that the Chinese did not stick to the deal as they broke a number of commitments they had made during previous negotiations.

As a result, the yuan dropped to 6.92, which is the lowest it has traded at since the 24th of December. However, analysts expect that China will take measures to prevent the yuan from dropping to 7 or more against the USD.

Yuan Recovers Slightly After Positive Comments from President Trump

On Tuesday, however, the yuan ended a streak of constant losses that lasted six days after President Donald Trump made some positive comments regarding the trade talks. Thus, Trump stated that he expected the negotiations to succeed, despite all the friction.

The result was a slightly more optimistic outlook of the trade talks, leading to the yuan rising by 0.25%. The Australian dollar also strengthened slightly on the back of this news and was trading at $0.6952.

The Australian dollar tends to be very susceptible to anything related to China because the country’s economy relies significantly on exports, and China is its main partner.

USD Largely Flat but Could Weaken If Trade War Continues

There are fears that if tensions continue, China might choose to sell off the vast number of U.S. Treasuries it owns, either to punish the U.S. or to at least threaten to do so to get more concessions in the negotiations.

These fears led to the USD weakening against the Swiss franc and the Japanese yen, which have long been safe-haven currencies for traders and investors.

According to Bipan Rai, the North American head of CIBC Capital Markets’ Forex strategy, the USD is trading defensively against certain major currencies because the market is a little worried considering that China owns a significant number of Treasuries.

He also stated that the euro could strengthen against the USD because the region has a BoP surplus. Historically, currencies in regions with a surplus tend to perform well, especially in situations of uncertainty, like the current trade war.

There’s also a question of whether tariffs will be imposed on auto parts and cars from China. In February, President Trump received an investigation report that is believed to suggest that importing cars and parts from China is a national security risk.

President Trump has until May 18th to deliberate on his decision, though experts believe this deadline will be extended. If there is no news, equities might suffer as a result this week.

If the U.S. does make all these higher tariffs permanent, it is likely the USD will suffer as investors retreat even further into safe-haven currencies like the Swiss franc and Japanese yen.

Written By
Alan Penny

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