China’s yuan rallied past 7 per dollar and analysts are already warning the strength won’t last.
The currency jumped as much as 0.60% to 6.9880 a dollar on Tuesday, trading stronger than the key level for the first time since August. The offshore rate rose as much 0.66%. The level had been a key support for the currency for years until August, when the central bank (PBOC) allowed it to weaken past 7 for the first time in more than a decade.
China’s yuan has proven to be a good barometre of progress in trade talks between Beijing and Washington. Its surge in the past month came as the two sides inched towards a deal and the greenback weakened.
Still, the latest gains coincide with China’s slowest economic growth since the early 1990s — one of the factors that prompted the central bank to lower one of its many interest rates.
“The yuan’s rally above 7 will only be temporary,” said Commerzbank AG’s Zhou Hao, the top yuan forecaster.
“The MLF cut shows the Chinese central bank may see a strong currency as harmful to the economy.”
Zhou also pointed to the People’s Bank of China’s daily reference rate — which has been set weaker-than-expected for four sessions — as a factor limiting more gains.
The fixing has been closely watched after the PBOC set it weaker than 7 per dollar in August, shattering a psychological barrier that officials had spent years defending.
The Chinese currency has now rebounded 2.7% since it fell to the weakest level since 2008 in early September. US Commerce Secretary Wilbur Ross said that reaching a phase-one deal will help rebuild trust between the two sides and could serve as a precursor to more talks.
“The easing trade tensions helped to override the downside surprises seen in the dreary China domestic economic data and have contributed to a convincing rally on the yuan,” said Stephen Innes, a strategist at AxiTrader.
While Citigroup Inc strategists say the yuan might strengthen towards 6.9 if Washington agrees to roll back tariffs imposed on Chinese goods in September, Li Liuyang, an analyst at China Merchants Bank said doubts will remain until a deal has been finalised.
The median forecast of analysts surveyed by Bloomberg is for the yuan to end the year at 7.15.