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Yuan Faces Downside Risks During Trade Talks, Citigroup Says

Yuan Faces Downside Risks During Trade Talks, Citigroup Says

(Bloomberg) -- Risks for the offshore yuan are skewed toward the downside as hopes of a “narrow” deal have been dented in recent days as China and the U.S. prepare for trade talks, according to Citigroup Inc.

China’s persistently defiant attitude on structural issues, and a newly narrowed focus in trade discussions -- opposed by U.S. President Donald Trump -- have extinguished optimism that a deal can be done, Citigroup strategists, including Johanna Chua, said in a note.

“The likelihood of plausible scenarios from the trade talks has also been shifting around rapidly,” the strategists said. “With due consideration to the expectation built up, we assess the risk for USDCNH is tilted upwards.”

New points of conflict outside the usual parameters of asymmetric trade and intellectual property rights have also emerged this week, darkening the prospects of trade-deal progress, they said. These include the potential restrictions on U.S. portfolio flows into China, as well as the Trump administration’s new blacklist of eight Chinese technology companies and accompanying visa ban on certain Chinese officials.

“China officials have left the door open to retaliate,” according to the report, dated Oct. 9. Tensions over the Hong Kong protests are also pressuring negotiations, the note added.

Yuan Faces Downside Risks During Trade Talks, Citigroup Says

Even though the talks have yet to begin, markets seem to be already shouldering the weighty expectations for the discussions, after contradicting headlines on the chances of a trade deal success whipsawed the Asian open Thursday. Price action noise will likely persist as the discussions formally get underway, the Citigroup strategists said.

To contact the reporter on this story: Sybilla Gross in Sydney at sgross61@bloomberg.net

To contact the editors responsible for this story: Edward Johnson at ejohnson28@bloomberg.net, Andreea Papuc, Ravil Shirodkar

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