China's yuan took a breather on Thursday, barely moving against the U.S. dollar, as the market calmed following some sharp falls stemming from increased Sino-U.S. trade tensions.
The yuan has lost more than 2% since U.S. President Donald Trump said on May 5 he was going to hike tariffs on $200 billion of Chinese imports. Market participants are now looking for cues on whether China will let its currency weaken further.
Traders said the news that the U.S. has hit telecoms giant Huawei with severe sanctions did not move the yuan.
Prior to market opening on Thursday, the People's Bank of China (PBOC) set its official yuan midpoint rate to a fresh 4-1/2-month low of 6.8688, 39 pips or 0.06% weaker than the previous fix of 6.8649. It was the softest setting since Dec. 27.
In the spot market, onshore yuan opened at 6.8800 per dollar and was changing hands at 6.8770 at midday, only 2 pips softer than the previous late session close and 0.12% weaker than the midpoint.
The behavior of the PBOC in recent days around the daily fixing for CNY suggests that the authorities will tightly manage the currency even if it is to go lower.
Market participants are widely discussing whether Chinese authorities would sell more U.S. Treasuries as an effective retaliatory measure against Washington's latest tariff hikes, after official data showed China sold the most Treasuries in almost 2-1/2 years in March.
While this might seem like a plausible threat, we view it as highly unlikely because the costs to China itself would be significant and the upside would be limited.
The market is still hoping for a trade agreement, possibly at a meeting of Presidents Trump and Xi at the G20 summit in Osaka on June 28 and 29, expects the onshore yuan to fluctuate around the 6.9 per dollar level for the time being.
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