Yuan Gains Expected to Be Capped as China Pushes Against U.S.

(Bloomberg) -- Any strength in the yuan will likely be restrained as China’s top trade and monetary policy officials delivered this weekend a subtle push-back against trade demands made by Washington, analysts and investors said.

People’s Bank of China Governor Yi Gang signaled that China’s exchange-rate fixing mechanism will remain in place, suggesting that any upside in the yuan from its current 6.65-to-6.90 range against the dollar is limited, for now, said Mansoor Mohi-uddin, the Singapore-based head of foreign-exchange strategy at NatWest Markets.

Yi said the yuan exchange-rate formation mechanism is in line with Group-of-20 standards and is decided by the market, as officials avoided any mention of a one-sided pledge by Beijing to hold its currency stable. Still, the governor said the two sides have reached consensus on many “crucial” issues.

Read more: China Pushes Against U.S. Trade Demands on Enforcement, Yuan

Mohi-uddin, NatWest Markets:

• “Governor Yi’s comments on the trade negotiations will help the yuan and overall sentiment on Monday morning,” easing concerns over the prospect of a deal following reports on Friday that both sides were “still far apart in their positions”
• The longer-term moves to bracket or tier reserve-requirement ratios may also help sentiment by signaling lower RRRs for smaller banks

Saed Abukarsh, the co-founder of Dubai-based hedge fund Ark Capital Management:

• “I’m not particularly convinced there is going to be a large positive impact on yuan at this stage”
• “If anything, China permitted the decline of yuan over the past eight months as a negotiation tool as well as a pressure valve on declining exports”
• “The structural changes that China is facing over the next few years will be the main driver of yuan equilibrium levels”
• “Dollar funding will continue to dominate EM and any credit tightening will weigh on EM”

Jameel Ahmad, the global head of currency strategy and market research at FXTM:

• Market sentiment has been “evidently jabbed” after the European Central Bank and a round of economic data “clearly pointing out that the global economy is facing downside risks.”
• “Therefore, investors really need an air of positive news to inspire some risk appetite back into valuations, and there is no better potential catalyst for such a change in sentiment than stronger optimism coming out of the ongoing U.S.-China discussions over a host of different issues”
• “Improved bilateral relations between the United States and China is in clear demand right now from investors and headlines,” with the recent developments being seen as “extremely positive news for financial market sentiment”
• Still, “investors might not ‘buy’ into this headline right away because quite a lot of U.S.-China optimism has been priced into the market over the past couple of weeks, but optimism is still very much needed for risk appetite to take the next step as we conclude Q1”

To contact the reporters on this story: Netty Ismail in Dubai at nismail3@bloomberg.net;Filipe Pacheco in Dubai at fpacheco4@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Andrew Davis, James Amott

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