Here’s What Could (Finally) Wake Up the Chinese Yuan

(Bloomberg) --

China’s yuan has become the world’s dullest currency as investors try to decide what to make of a trade war stalemate and uncertainty over monetary policy.

A gauge of two-week historical swings was the lowest among 30 major exchange rates on Thursday, and a measure of expected volatility remains near the lowest since a shock devaluation in 2015. The calmness comes as China and the U.S. remain deadlocked in their dispute. Meantime, the Asian nation’s economic data is mixed, so questions about how much the People’s Bank of China will ease remain unanswered.

“The yuan has been treading water as we await more news on the progress of trade talks,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd. Expectations China will limit any weakness are also helping to keep it at a standstill, he added.

The yuan is never boring for long -- wild moves can happen at any time. Below are some factors likely to make traders’ days hectic soon.

Trade War

The China-U.S. trade clash has been the single biggest driver of yuan moves since it flared up last year -- and that should continue. Traders will be keen to see what comes of a trip by U.S. negotiators to China next week. While signs of a breakthrough will push the yuan higher, any hint that discussions are failing will send it tumbling.

Fed Cut

The Fed appears ready to reduce interest rates at the end of the month. Meanwhile, PBOC Governor Yi Gang said the country will continue to “look at its own real situation” when making such decisions. The divergence in the monetary policies between the world’s two largest economies has already pushed the gap between the yields on their 10-year government bonds to the biggest since January 2018. That makes yuan assets more appealing relative to U.S. ones, supporting the Chinese currency.

Global Easing

The Fed isn’t alone in loosening. Central banks from Europe to East Asia are also on an easing path. This is potential good news for the yuan, according to Tommy Xie, an economist at Oversea-Chinese Banking Corp. His reasoning is that if investors sense easing is sparking currency wars, they may embrace China’s stability. The yuan could rise to as high as 6.7 a dollar by year’s end on capital inflows, Xie added.

The yuan was little changed at 6.8750 a dollar as of 4:40 p.m. in Shanghai.

The PBOC said last week that monetary policy needs to be prudent

Fund Inflows

Last weekend, China opened its financial system to more foreign investment, saying it would make it easier for overseas funds to buy debt in the interbank market and allow foreign credit rating firms to assess Chinese bonds. These measures could also spur capital inflows, and of course push the yuan higher.

Politburo Meeting

Traders will also be watching to see what happens when China’s top leaders, including President Xi Jinping, hold a Politburo meeting later this month. Policy makers may signal steps to help the economy as it comes under pressure in the second half, said Ming Ming, head of fixed-income research at Citic Securities Co. Those efforts would push the yuan lower.

Rates Reform

The PBOC could do some easing by reforming its interest-rate system. The changes, which may involve letting banks price corporate loans with a market-based rate that’s lower than the benchmark lending figure, may happen as soon as this quarter, according to Zhaopeng Xing, an economist at ANZ. They would push bond yields down, making yuan debt less appealing.

--With assistance from Ran Li.

To contact the reporter on this story: Tian Chen in Hong Kong at tchen259@bloomberg.net

To contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, Philip Glamann, David Watkins

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