China's Yuan Rally Seen Short-Lived Despite Trade Optimism

(Bloomberg) -- As traders pile into China’s yuan on bets authorities will keep the currency steady, some analysts warn there’s little room for it to appreciate much further.

The yuan rallied to its highest level in more than two weeks on Wednesday after people familiar with ongoing trade talks said the U.S. is asking China to keep the value of its currency stable as part of the negotiations. The move is aimed at neutralizing any effort by Beijing to devalue its currency to counter American tariffs, they said. The yuan strengthened 0.51 percent to 6.7252 per dollar as of 4:47 p.m. local time.

“It doesn’t make much sense to long the yuan at the moment" as Chinese authorities won’t want excessive strength in a slowing growth environment, said Zhou Hao, a senior emerging markets economist at Commerzbank AG. "The yuan will find a ceiling at around 6.7 per dollar. The market is being overly optimistic right now."

Alan Yip, a senior foreign-currency market strategist at Bank of East Asia Ltd., echoed Zhou’s view that a further rally is unlikely. The yuan will find a ceiling at around 6.6 to 6.7 per dollar, he said. The currency has climbed more than 3 percent since presidents Xi Jinping and Donald Trump agreed on a temporary trade truce at the start of December, rebounding from a decade-low in October.

"We do not look for sharp yuan appreciation even if China pledges to stabilize the currency," said Ken Cheung, a senior Asian foreign-exchange strategist at Mizuho Bank Ltd. Further monetary easing by the central bank, weak economic growth and a narrower current account surplus do not justify a sharp rally in the longer term, he said.

While gains in the yuan may be capped, significant weakening may also be limited, trapping the currency in a range-bound trading. The likelihood of the yuan depreciating beyond 7 per dollar has fallen, according to Gareth Berry, foreign-exchange and rates strategist at Macquarie Bank Ltd.

The yuan staged a stunning comeback this year, after tumbling 5.4 percent in 2018, thanks to easing trade tensions and a sliding greenback. That has prompted global banks, including Goldman Sachs Group Inc. and Bank of America Merrill Lynch, to boost forecasts on the exchange rate over the past few weeks. Traders also refrained from betting against the yuan, even though its funding costs hovered near the lowest since 2011 in the forwards market.

"The yuan will be more managed in the first half of this year," said Christy Tan, head of markets strategy at National Australia Bank Ltd. in Singapore. "Some optimism on the yuan will still be forthcoming if a trade deal is agreed and signed."

--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: Richard Frost at rfrost4@bloomberg.net, Kana Nishizawa, Magdalene Fung

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