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Yuan falls to 1-week low as Trump threatens to raise tariffs if trade talks fail

Credit: REUTERS/THOMAS WHITE

China's yuan fell to a one-week low against the dollar on Wednesday after U.S. President Donald Trump said he would raise tariffs on Chinese goods if the two countries fail to reach a trade deal.

SHANGHAI, Nov 13 (Reuters) - China's yuan fell to a one-week low against the dollar on Wednesday after U.S. President Donald Trump said he would raise tariffs on Chinese goods if the two countries fail to reach a trade deal.

While Trump on Tuesday dangled the prospect of completing an initial trade agreement "soon," he offered no new details on negotiations, rattling investors who had been encouraged by signs of progress last month.

"We're close," Trump said in a speech. "A significant phase one trade deal with China could happen. Could happen soon. But we will only accept a deal if it's good for the United States and our workers and our great companies."

If a 'phase one' trade agreement fails, any tariff hikes would likely spark a re-escalation of China-U.S. tensions and could send the onshore and offshore yuan back to the 7.1 level quickly, said Ken Cheung, chief Asian FX strategist at Mizuho Bank in Hong Kong.

"Investors should be alert to the event risk of a Xi-Trump meeting and should not take the phase one deal for granted."

Twists and turns in the protracted trade dispute have been the key factor influencing the yuan's moves for over a year, with escalating U.S. tariffs putting further pressures on China's slowing economy.

Onshore spot yuan CNY=CFXS fell to a low of 7.0270 per dollar at one point in morning trade, the weakest level since Nov. 5. At midday, it was changing hands at 7.0212, 139 pips or 0.2% weaker than the previous late session close.

Prior to the market opening on Wednesday, the People's Bank of China (PBOC) set the midpoint rate CNY=PBOC at 7.0026 per dollar, 38 pips or 0.05% weaker than the previous fix of 6.9988.

Wang Tao, an economist at UBS in Hong Kong, said the yuan should face continued downward pressure but should stay largely stable next year.

"In our base case, additional tariff hikes in December and a further drop in China's external demand will likely put persistent depreciation pressure on the CNY," Wang said in a note on Wednesday.

"In addition to the likely commitment associated with the 'phase one' trade deal, the government may be concerned about a sharp depreciation hurting domestic confidence and triggering capital outflows."

The global dollar index .DXY rose to 98.336 at midday from the previous close of 98.309.

The offshore yuan CNH=D3 was trading at 7.0234 per dollar as of midday.

The yuan market at 0405 GMT:

ONSHORE SPOT:

Item

Current

Previous

Change

PBOC midpoint CNY=SAEC

7.0026

6.9988

-0.05%

Spot yuan CNY=CFXS

7.0212

7.0073

-0.20%

Divergence from midpoint*

0.27%

Spot change YTD

-2.11%

Spot change since 2005 revaluation

17.88%

Key indexes:

Item

Current

Previous

Change

Thomson Reuters/HKEX CNH index

92.26

92.43

-0.2

Dollar index

98.336

98.309

0.0

*Divergence of the dollar/yuan exchange rate. Negative number indicates that spot yuan is trading stronger than the midpoint. The People's Bank of China (PBOC) allows the exchange rate to rise or fall 2 percent from official midpoint rate it sets each morning.

OFFSHORE CNH MARKET

Instrument

Current

Difference from onshore

Offshore spot yuan CNH= *

7.0234

-0.03%

Offshore non-deliverable forwards CNY1YNDFOR= **

7.0958

-1.31%

*Premium for offshore spot over onshore CNY=CFXS

**Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. CNY=SAEC.

(Reporting by Winni Zhou and John Ruwitch; Editing by Kim Coghill)

((winni.zhou@thomsonreuters.com; +86 21 2083 0100; Reuters Messaging: winni.zhou.thomsonreuters.com@reuters.net))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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