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Yuan to weaken with or without U.S.-China trade progress: Reuters poll

By Vivek Mishra

BENGALURU (Reuters) – There will be no respite for the battered Chinese yuan over the coming year as U.S.-China trade relations are expected to remain rocky despite recent hopes for some resolution, a Reuters poll of FX strategists found.

After weakening nearly 1.3% against the dollar in 2019, the yuan has pared some of those losses in the first days of 2020. It rose to a five-month high on Thursday on optimism Washington and Beijing will sign a Phase 1 trade deal next week.

But a majority of strategists polled by Reuters expressed caution about the rising yuan and did not expect that trend to last without a broader, clearer and permanent deal that rolls back existing tariffs.

“I believe future trade deals will break down and there is no reason for recent optimism – this is just an illusion. In the long term, there is an absolute bearish renminbi,” said Michael Every, head of financial markets research for Asia-Pacific at Rabobank.

“Although China could swallow this deal that it doesn’t like, keeping the yuan temporarily stable, it’s unlikely that Beijing would want to see the yuan move higher, and especially not to please the U.S.”

According to the Jan 3-9 poll of over 60 strategists, the yuan <CNY=CFXS> was predicted to weaken about 1% to 7.0 per dollar in three months and hover around that rate in 12 months time. It was trading around 6.92 on Thursday.

Hopes of some sort of an agreement have increased on reports Beijing has agreed to Washington’s demands.

But one potential impediment to progress is a demand that China buy more U.S. farm products. Chinese media group Caixin reported Beijing would not increase its annual low-tariff import quotas for corn, wheat and rice.

“High yuan volatility will continue even if there is a Phase 1 deal because the market will then start to question the likelihood of Phase 2 or 3 deals,” said Iris Pang, Greater China economist at ING.

“The market is likely to remain skeptical on progress of the trade talks (until) after the U.S. presidential election. It seems likely that trade tensions will persist even if there is a new U.S. president, which is also uncertain.”

The trade war has not only weighed on most emerging-market assets, including the yuan, but the underlying economies also suffered in 2019 and were expected to slow further this year. Wall Street stocks, on the other hand, are trading near record highs.

To shore up the Chinese economy, the People’s Bank of China last week said it would cut the amount of cash all banks must hold as reserves, likely exerting further pressure on the yuan.

“Even with the Phase 1 deal done, we expect Chinese economic growth to continue to slow,” said Khoon Goh, head of Asia research at ANZ.

“We believe that there will be quite strong onshore dollar demand to meet interest repayments that are due this year. This all will lead to some modest weakening in the yuan.”

Still, views on how the yuan will trade in the year-ahead were somewhat less pessimistic than previous polls.

Twenty-four of 49 common contributors from last month revised their forecasts to show a stronger yuan. Eleven downgraded their outlook. The rest left it unchanged.

That was in line with a separate Reuters poll on currency positioning, which showed bullish bets on the yuan scaled to a near 10-month high. [ASIA/FXP]

(Other stories from the global foreign exchange poll:)

(Polling by Khushboo Mittal and Shaloo Shrivastava; editing by Ross Finley, Larry King)