Yuan Is Halfway Through Erasing Losses Since Trade War Began

China’s rallying yuan is more than halfway through its recovery from a selloff triggered by President Donald Trump’s trade war.

Underpinning the recent strength in the Chinese currency are its wide interest-rate premium over the borrowing costs on the dollar and the country’s relatively fast economic recovery from the virus pandemic. The prospects of a win by Joe Biden in the U.S. presidential election are also boosting confidence in the yuan because the Democrat is expected to be less hostile -- or at least more predictable -- in his policies toward Beijing.

The yuan is poised for a gain of 1.1% this week to 6.6215 per dollar, closing in on the key level of 6.6 for the first time in more than two years. The currency has jumped 8.3% since late May, trimming more than half of the declines since China-U.S. disputes in everything from trade to intellectual property protection sent the exchange rate to the weakest level in a decade.

Yuan Is Halfway Through Erasing Losses Since Trade War Began

“Now is a good time to long the yuan,” said Gao Qi, a strategist at Scotiabank in Singapore. “The yuan rally will continue if a Biden win is secured. We expect the yuan may rise to 6.4 by end of this year, or even stronger to 6.25, recouping all losses since the trade war started.”

The rapid rally is a double-edged sword for Beijing. While it opens an window for policy makers to liberalize the foreign-exchange market, it also hurts exporters repatriating overseas funds. In October, China relaxed its controls on the yuan at the fastest pace since after a shock devaluation five years ago, easing curbs on capital outflows and giving banks more say on the reference rate.

The People’s Bank of China has set its fixing at levels weaker than analysts and traders had expected for 10 straight sessions, suggesting authorities could be seeking to slow the gains. On Friday, the gap between the official reference rate, which limits the onshore yuan’s moves by 2% on either side, and the expected rate in a Bloomberg survey was the largest since August 2019.

While poised for an overall gain this week, the yuan declined 0.13% as of 4:37 p.m. on Friday.

©2020 Bloomberg L.P.

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