(Bloomberg) -- China extended its support for the yuan by setting its daily reference rate for the managed currency at a level stronger than 7.2 per dollar, as escalating trade tensions with the US add to the depreciation pressure on the yuan.
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The People’s Bank of China set the so-called fixing at 7.1693 per dollar on Wednesday as onshore markets reopened after Lunar New Year holidays. The central bank has been holding the fixing at levels stronger than 7.2 per dollar to shield the yuan from the dollar’s gains since Donald Trump won the US Presidential election in November.
The move signals authorities are unwilling to let the yuan weaken even as the latest tit-for-tat trade measures between the US and China weigh on the currency. Some analysts had been expecting the PBOC to let the yuan weaken in order to raise the attractiveness of Chinese exports and blunt the impact of US tariffs, a contention that’s not yet materialized.
“The status quo of yuan fixing support is consistent with the stance to avoid further escalations in China-US tensions,” said Ken Cheung, chief Asian foreign-exchange strategist at Mizuho Bank Ltd. “China shows stance to preserve FX stability, which could contain capital outflow pressure.”
Goldman Sachs Group Inc. forecasts the fixing to gradually drift weaker toward 7.3 and the onshore yuan to reach 7.4 to 7.5 levels. National Australia Bank says the currency will head toward 7.5 in only a matter of time unless a trade agreement is reached with the US.
On Tuesday, China levied a tax on some products imported from the US and started a probe into Google on anti-trust law breaches, just after Washington imposed a 10% tariff on all Chinese goods.
Traders are now waiting to see if leaders of the world’s two biggest economies can quickly reach an agreement on trade. Trump said on Monday he will seek a deal with China, and that talks would take place shortly. He said on Tuesday there’s no rush to speak with Chinese President Xi Jinping and a call would take place at the appropriate time.
“A ‘good call’ can see USD/CNH trade lower and the fixing probably should matter less,” said Christopher Wong, a strategist at Oversea-Chinese Banking Corp. “At this point of time, the key focus is on whether there will be de-escalation, like what we’ve seen with Mexico and Canada.”