Tensions with the US have cooled and a ‘phase one’ trade deal is expected this month
China’s currency strengthened to its highest level in five months as risk sentiment returned to global markets on Tuesday.
The onshore-traded renminbi rose 0.6 per cent to reach Rmb6.9340 per dollar late in the Chinese trading day, leaving it on track for its best daily performance in six months and its strongest levels since US-China trade tensions were roiling markets in early August.
Washington spent much of last year accusing Beijing of manipulating its currency lower to juice the economy as trade tensions escalated, and the renminbi sent a shudder through global markets when it weakened past Rmb7 per US dollar in August for the first time since 2008. The currency is permitted to trade 2 per cent on either side of a daily midpoint set by the People’s Bank of China.
The currency’s jolt above its 200 day moving average — a key level watched by technical analysts — on Tuesday came as tensions between Washington and Beijing have cooled ahead of the expected signing of a “phase one” trade deal at the White House on January 15.
Line chart of Renminbi per US dollar showing China’s currency strikes highest level since August
The US and China on December 13 reached a limited agreement to pause the trade war between the countries, and President Trump has said he will travel to Beijing at an unspecified later date to begin “phase two” talks.
“We reckon the Phase One deal should make it over the line as planned this month, while signs of green shoots in the economy also should support the currency, though we still see only stabilisation in the economy at large and think the recovery is on shaky legs, for now,” said Freya Beamish, chief Asia economist at Pantheon Macroeconomics.
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“At the same time, progress on a comprehensive deal seems unlikely, so this could be as good as it gets for the renminbi from that perspective.”
Data released earlier on Tuesday showed that China’s FX reserves rose in December, suggesting that the PBoC refrained from direct intervention into the foreign exchange markets last month, said Julian Evans-Pritchard, senior China economist at Capital Economics.
“This has helped to shore up the renminbi and appears to have been driven by easing trade tensions.”
The detente between the world’s two major powers added fresh fuel to global equity markets, which rallied to all-time peaks at the end of 2019.
Still, asset managers polled by the FT said that uncertainty surrounding the relationship between the US and China remains the biggest challenge for the global economy and stability of financial markets this year. FT.com