U.S.-China Truce Could Send Yuan to Five-Year High, MUFG Says

(Bloomberg) -- A currency agreement between the world’s two largest economies could help propel China’s yuan to its strongest level versus the dollar in more than five years, according to Kuniyuki Hirai, head of trading at MUFG Bank.

Any eventual trade resolution between the U.S. and China would likely include a foreign-exchange agreement that would weaken the dollar, given U.S. President Donald Trump’s repeated complaints about the currency’s strength, Hirai said at an MUFG event in New York on Wednesday. Using the 1985 Plaza Accord’s effect on the yen as a guide, Hirai sees the dollar-yuan rate gradually falling to as low as 6.05, a level unseen since 2014.

“If history is any guide, and if we can refer back to the ’80s, ’90s from the dollar-yen movement, the dollar is going lower,” Hirai said.

As part of a comprehensive trade deal with China, Treasury Secretary Steven Mnuchin has said the U.S. was seeking the “strongest ever” currency agreement to avoid competitive devaluations. Chinese officials have talked about the need for the U.S. to respect their autonomy and it’s unclear how much sovereignty over the yuan they will want to cede in any potential trade agreement.

The Plaza Accord -- an agreement between the U.S. and four other nations to jointly depreciate the dollar -- saw the greenback weaken nearly 70% against the yen in the decade that followed, with the dollar-yen rate bottoming at 79.75 in 1995. The pair currently trades at about 108.

Currencies have emerged as a focal point in trade talks, given that a strengthening dollar makes U.S. exports more costly. The administration proposed taxing goods from countries with underd currencies last month -- a proposal that was said to alarm even its own Treasury Department officials.

After Trump raised tariffs on $200 billion of Chinese imports last month, the yuan quickly fell toward 7 per dollar -- a level not seen since the global financial crisis a decade ago. The currency’s decline has drawn fresh criticism from Trump, who complained last week that it has nullified some of the punitive effects of the levies.

However, both the U.S. and China have a shared interest when it comes to making sure the yuan doesn’t slide too far, according to Hirai. China’s economy has shifted from being export-led -- where a weaker currency would be beneficial -- to being more domestic-centric. For that reason, any break above the closely watched level of 7 per dollar would be shallow, he said.

“In that type of economy, the Chinese government would not love to see continuous depreciation of their currency,” Hirai said. “If clients ask me, I always say dollar-renminbi above 7 would be short-lived.”

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