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(Bloomberg) -- Currency traders are waiting with bated breath for China’s next daily reference rate for the yuan, with some expecting authorities to relax their tight grip, if Donald Trump’s tariffs go into effect.
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The People’s Bank of China may set the so-called fixing weaker than 7.2 per dollar, according to Australia & New Zealand Banking Group and Malayan Banking Bhd., with the former expecting a breach this week. The level has been tightly guarded by the PBOC since November, when Trump’s election win spurred the managed currency’s slide.
A surging dollar is making it difficult for authorities to prop up the yuan after months of efforts to stabilize it using a range of tools. Some analysts believe a weaker yuan is necessary to offset the impact of higher tariffs, even if the move spurs capital outflows. Goldman Sachs Group Inc. expects the fixing to gradually drift higher toward 7.3.
“Some adjustment for the yuan will be required as the currency needs to play a shock absorber role,” said Khoon Goh, head of Asia research at ANZ Banking Group. “There will be broader spillover effects on other Asian currencies, and the region’s assets may come under pressure from near-term portfolio outflows.”
The PBOC will show its intentions on Wednesday when mainland markets reopen. The Bloomberg dollar index has risen in all but one session since Jan. 27, when China last traded before the Lunar New Year holiday. The fixing limits moves in the onshore yuan by 2% on either side.
Read: Xi Weighs Retaliation After Trump Hits China With 10% Tariff
The offshore unit weakened as much as 0.7% to 7.3734 on Monday following Trump’s 10% tariff announcement on China over the weekend, reaching its lowest since October 2022. It has since recouped the losses as Trump said the US will speak to China regarding tariffs, adding that levies will be substantial if no deal is reached.
While a 10% levy is better than the 60% threatened by Trump during his campaign trail, the specter of a trade war further dims China’s outlook, as exports have been a rare bright spot amid sluggish domestic demand.
The yuan may see big swings if the two sides reach a last-minute agreement. Trump said he’s delaying 25% tariffs on Canada and Mexico for a month after both US neighbors agreed to take tougher border control measures, leading to a rebound in their currencies.