(Bloomberg) — The yuan’s rally that took it to an eight-month high this week may prove fleeting as economic headwinds and a potential dollar rebound weigh on further gains, analysts say.
The currency’s attempt to break out of its recent narrow trading range will be limited by pressure from higher US tariffs, even if a trade deal is reached, and sluggish domestic demand, they said. The dollar meanwhile could be set to recover as traders wind back bets on Federal Reserve interest-rate cuts.
“We still see the Chinese yuan weaker by the end of the year,” said Becky Liu, head of China macro strategy at Standard Chartered Bank in Hong Kong. While the currency’s current upward momentum may be sustained for a little longer, the “fundamental drivers across GDP, exports, and the current-account surplus are likely to fade,” she said.
The onshore yuan advanced to as strong as 7.1478 per dollar Thursday, a level last seen in November, before closing at 7.1563. The high for the day saw it briefly break out of the 7.15-to-7.20 trading range that has held since the start of June.
The People’s Bank of China helped encourage Thursday’s rally by setting its daily yuan fixing stronger than 7.14 per dollar for the first time since November. The fixing is a level around which the currency is allowed to move by 2% in either direction.
One reason for the recent yuan gains has been the government’s so-called “anti-involution” campaign, which aims to limit oversupply and price competition, and thereby counter deflation.
“I believe the yuan will resume its depreciating trend, as the enthusiasm over anti-involution cools down,” said Ryan Lam, head of research at Shanghai Commercial Bank Ltd. in Hong Kong. At the same time, “US exceptionalism is alive and well, as least over the next few months. I expect the yuan to re-test 7.20 per dollar,” he said.
The yuan’s latest gains may also be at least partly driven by official efforts to widen the currency’s trading range.
The yuan needs to maintain reasonable elasticity to help encourage further internationalization as global investors grow more doubtful about dollar-denominated assets, Miao Yanliang, deputy head of the research department at China International Capital Corp., wrote in an article published Wednesday.
Miao’s comments echoed those made on Tuesday by Zhang Bin, an official at a government-linked think tank, who called for the authorities to leave room for potential yuan appreciation even as they seek to defend it when it weakens excessively.
–With assistance from Qizi Sun and Julia Zhong.
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