Traders Hitch Fortunes to Yuan With Fixation on Currency Pact

(Bloomberg) -- Traders are returning to work Monday with a little less angst as the world’s biggest economies edge toward a trade deal.

All eyes were on the yuan as the U.S. and China discussed the critical issue of enforcement in a proposed agreement that would ensure Beijing lives up to its promise to not depreciate the currency. President Donald Trump said Sunday he’ll extend a deadline to raise tariffs on Chinese goods beyond this week, citing “substantial progress” in the talks. The discussions had already been extended into the weekend.

The offshore yuan strengthened for the fourth day in five, trading below 6.70 per dollar for the first time since July. The U.S. currency slipped against most of its leading peers.

“Regional currencies could enjoy a positive day following Trump’s trade tweet,” Jeffrey Halley, senior market analyst in Singapore at Oanda Corp., wrote in note early Monday. “The talks have hung like a dark cloud over emerging Asia despite the fact stocks markets have bounced aggressively since January. Questions still linger about just how China will ‘manage’ its currency or even if it will agree to, but this should be lost in the post-trade-talk afterglow this week.”

The onshore yuan advanced 0.3 percent to 6.6883 per dollar as of 11:04 a.m. in Shanghai, while the offshore yuan was 0.4 percent stronger at 6.6906 per dollar.

Jameel Ahmad, Limassol-based global head of currency strategy and market research at FXTM:

• “This follows the narrative that authorities prefer to see stability in the Chinese currency, with potential strength in the yuan being something that would be warmly received by financial markets”
• “It would add investor appetite back into portfolios, which generally means stronger stock market momentum and improved demand for emerging market currencies”
• “I don’t think it would be a matter of either side controlling a currency but allowing market forces to play their role”
• “There have not been any indications at all that China has allowed the yuan to weaken in recent months and, if anything, the narrative from China has been one of confidence in their currency and that authorities see stability in the yuan over the longer term”

Goldman Sachs Group Inc. strategists, including New York-based Zach Pandl:

• The yuan is set to trade with an “appreciation bias” in the coming months. A commitment not to competitively devalue the yuan to offset tariffs would be consistent with the existing foreign-exchange policy goals of both the U.S. and China, and that appears to be the most likely outcome
• Lowers USD/CNY forecasts to 6.65, 6.65 and 6.60 in three, six and 12 months versus 6.80, 6.80 and 6.70 previously
• Still, USD/CNY is not far from Goldman’s estimated fair value of around 6.50, and “cyclical considerations likely argue for only a modest amount of currency appreciation to be tolerated”
• “Even in the event of a more ambitious currency agreement than we expect, there are limits to the extent of likely USD/CNY downside, but a move below 6.50 is possible if policymakers were to tolerate an overvaluation similar to the 2013-2015 period”

Christopher Langner, an investment strategist at First Abu Dhabi Bank Private Banking in Dubai:

• While foreign-currency markets in general have reacted quickly to the trade-war issues, Asia-Pacific currencies, including the Australian and the New Zealand dollars, are the most likely to reflect any progress
  • The Australian and New Zealand economies have a significant correlation to China’s given how much they export to the country
• Both the U.S. and China have a strong incentive to reach an agreement
• “The uncertainty related to the trade war was an important factor driving the EM selloff last year and any sign that the issue is going away could be cheered by EM investors”

Abdul Kadir Hussain, the head of fixed-income asset management at Dubai-based Arqaam Capital:

• Progress in talks “should lead to the bounce in risk continuing”
• “We have had a strong move this year already, so you might get a little bit of a ‘buy the rumor, sell the fact,’ where investors start fading a rally if it occurs on the back of this”

Charles-Henry Monchau, a managing director at Al Mal Capital in Dubai:

• “A trade deal looks more and more likely”
• If investors are seeking to “play the trade deal,” they should put their money into stocks or sectors that bore the brunt of the trade war last year
• These would include Asian markets, some commodities like copper, European exporters such as car companies, “which have been deeply penalized by trade”

Luciano Jannelli, the head of investment strategy at Abu Dhabi Commercial Bank:

• “We are closer to an extension” in the deadline
• While the yuan is set to extend its recent gains, China’s policy makers will seek to control its fluctuation “because the trade deal is more important than fluctuations in the currency for them”

Hasnain Malik, the head of equity research at Exotix Capital in Dubai:

• “There is no simple solution to the conflicting interests that led to the trade war in the first place. So, for markets, the main focus is that dialogue continues constructively”
  • “We are unlikely to see a full and lasting resolution of these differences”

--With assistance from Manus Cranny and Benjamin Purvis.

To contact Bloomberg News staff for this story: Netty Ismail in Dubai at nismail3@bloomberg.net;Filipe Pacheco in Dubai at fpacheco4@bloomberg.net;Qizi Sun in Beijing at qsun62@bloomberg.net;Linus Chua in Singapore at lchua@bloomberg.net;Yumi Teso in Bangkok at yteso1@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Justin Carrigan, Tomoko Yamazaki

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With assistance from Bloomberg