An employee at a currency exchange store counts Chinese one-hundred yuan banknotes in Hong Kong, China (Photographer: Xaume Olleros/Bloomberg)

China Is Weakening Its Currency Before U.S. Trade Talks Begin

(Bloomberg) -- China weakened its daily currency fixing by more than traders and analysts had expected before high-ranking U.S. officials arrive in the country to discuss trade issues.

The People’s Bank of China cut the reference level to 6.3670 per dollar, weaker than the average estimate of 6.3610 in Bloomberg survey of 21 traders and analysts. The deviation is the biggest since Feb. 7 and continues a pattern set in April when the fixing was weaker than expected on all but one day, according to Bloomberg calculations.

"The move in the fixing today is aggressive," said Ken Cheung, a currency strategist at Mizuho Bank Ltd. in Hong Kong. "China may want to weaken the yuan pre-emptively before the trade talks with the U.S., so that they have room to strengthen the currency" if needed, Cheung said, adding that policy makers may also be keen to arrest the yuan’s advance against a basket of peers.

A U.S. delegation led by Treasury Secretary Steven Mnuchin will be in China to discuss economic and trade matters with Vice Premier Liu He on Thursday and Friday, according to state-run China Central Television. White House advisers Larry Kudlow and Peter Navarro, and Commerce Secretary Wilbur Ross will also be in Beijing in a bid to narrow the U.S. trade deficit.

The PBOC will continue to weaken the fixing amid strength in the dollar as it seeks to keep the trade-weighted index stable, according to Adarsh Sinha, Hong Kong-based co-head of Asia currency and rates strategy at Bank of America Merrill Lynch. Investors will turn more bearish on the yuan under the central bank’s guidance and push the currency to as low as 6.5 per dollar in the coming two to three months, he said.

The yuan fell 0.45 percent, the most since March 1, to 6.3595 per dollar as of 4:52 p.m. in Beijing, and lost 0.3 percent in Hong Kong. The official CFETS RMB Index, which tracks the Chinese currency against 24 exchange rates, was last at the highest level since April 2016.

"China might be concerned that potential worsening of trade conflicts with the U.S. will likely hurt exports, and it might be sending a signal that the currency can be weakened further if tension escalates," said Qi Gao, a Singapore-based strategist at Scotiabank. "The PBOC won’t allow rapid declines, as such moves could trigger large capital outflows and are hard to contain."

©2018 Bloomberg L.P.

With assistance from Tian Chen, Emma Dai

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