The Chinese yuan spikes to a 3-month high as trade tensions ease

(Kevin Frayer / Getty Images)
  • The Chinese currency is trading at 6.8373 yuan per dollar, i ts highest level in almost three months.
  • The onshore yuan has rallied 1.8% this week, its largest two-day gain in more than a decade.
  • The yuan’s gains come after a trade-war truce soothed tariff nerves and as US Treasury yields slipped.

The Chinese currency hit its highest level in three months, at 6.8373 yuan per dollar, after a tentative trade truce between the US and China.

The onshore yuan, which trades on China’s domestic markets, has rallied 1.8% this week, making for its largest two-day gain since July 2005 – when China tossed away its currency peg and replaced it with a more flexible foreign-exchange regime.

The yuan’s rally comes after a meeting between President Donald Trump and Chinese President Xi Jinping soothed tariff fears at a meeting at the G20 summit in Buenos Aires, Argentina, on Saturday. Trump agreed to postpone new tariffs on Chinese imports by 90 days and Xi said China would purchase “a not yet agreed upon, but very substantial” amount of US goods and label Fentanyl a controlled substance. The current 10% tariffs on $US200 billion of Chinese imports will jump to 25% if an agreement isn’t reached by the beginning of March, the White House said.

The yuan’s rally also comes as US Treasury yields have slipped to their lowest level since the middle of September. On Tuesday, the 10-year Treasury note yield fell about 5 basis points to 2.92%. Meanwhile, the spread between the two- and 10-year note yields dropped to 14 basis points, the flattest level since June 2007, spurring some concerns about a possible recession.

Analysts at Societe Generale said the dollar will regain its strength early next year, but will peak in mid-2019.

“The truce agreed in Buenos Aires probably won’t prevent a move through USD/CNY 7.0 in 1Q19, but a 3-5% move won’t prevent the dollar falling if, as we expect, the US economic cycle finally turns lower,” analysts said on Tuesday.

“Peak growth is already (just) behind us, and the fed funds rate will be likely peak in mid-2019, by which time the dollar will probably have peaked too.”

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