SHANGHAI, Aug 14 (Reuters) - China's yuan jumped against the greenback on Wednesday to the highest level in a week, as Washington's decision to delay tariffs on Chinese exports eased worries over the trade war and pressure on the currency.
But with fresh economic data pointing to a further slowdown in China's economy, and lingering uncertainty around Sino-U.S. trade progress, analysts predict further yuan weakening over the coming year.
U.S. President Donald Trump on Tuesday backed off his Sept. 1 deadline for 10% tariffs on remaining Chinese imports, delaying duties on cellphones, laptops and other consumer goods. The announcement was made following renewed trade discussions between U.S. and Chinese officials.
The news, which revived hopes for a pause in the damaging trade war, gave an immediate lift to the yuan, which had breached the psychologically key seven-per-dollar level this month on Trump's tariff threats.
Snapping a nine-session losing streak, China's central bank set the yuan's midpoint rate at 7.0312 per dollar prior to market open. At midday, onshore yuan was changing hands at 7.0227, 0.47% stronger than Tuesday's close. Barring a sharp afternoon correction, it would be the biggest daily rise in nearly two months.
The offshore yuan also jumped following the U.S. tariff delay announcement. It enjoyed some additional support as the PBOC wrapped up a 30 billion yuan bills sale in Hong Kong.
"The tariffs delay revived hopes for a pause of tit-for-tat in the trade war and resuming the trade negotiations in early September," wrote Ken Cheung, Hong Kong-based strategist at Mizuho Bank.
However, "in light of lingering trade war risk and weakening China data, we maintain our call on RMB weakening till year-end but the one-way RMB depreciation could turn into two-way volatility mode in the near term."
Foreign exchange strategists polled by Reuters predicted the yuan would weaken about 1% to 7.10 per dollar by end-October. It is then forecast to gain slightly to 7.06 in a year, close to where it was trading now.
On Tuesday, Zhu Jun, head of the central bank's international department, told Reuters in an interview that China's yuan is at an appropriate level currently and two-way fluctuations in the currency will not necessarily cause disorderly capital flows.
The comments, apparently aimed at easing fears of persistent yuan devaluation, comes amid fresh signs of economic stress.
On Wednesday, China reported a raft of unexpectedly weak economic data, including a surprise drop in industrial output growth to a more than 17-year low. Reflecting expectations for fresh government easing, the yield on 10-year Chinese government bonds fell below 3% on Wednesday for the first time since December 2016.
Still, Philip Wee, FX Strategist, said Trump's tariff relief is "a welcome sign of a temporary de-escalation in the China-U.S. trade war", adding the yuan's stabilisation is good for emerging market currencies.
Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 7.0832, 0.73% away from the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate.
The yuan market at 4:57AM GMT:
ONSHORE SPOT: Item Current Previous Change
PBOC midpoint 7.0312 7.0326 0.02% Spot yuan 7.0177 7.0558 0.54%
Divergence from -0.19% midpoint*
Spot change YTD -2.06% Spot change since 2005 17.94% revaluation
Key indexes:
Item Current Previous Change Thomson 92.33 91.46 0.9 Reuters/HKEX
Dollar index 97.788 97.812 0.0 *Divergence of the dollar/yuan exchange rate. Negative number indicates that spot yuan is trading stronger than the midpoint. The People's Bank of China (PBOC) allows the exchange rate to rise or fall 2 percent from official midpoint rate it sets each morning.
OFFSHORE CNH MARKET
Instrument Current Difference
from onshore
Offshore spot yuan 7.0316 -0.20%
*
Offshore 7.0832 -0.73%
non-deliverable