(Jan 28): Investors remain sceptical about the Chinese yuan, fearing the potential for volatility during and after the upcoming one-week trading holiday, despite the country’s apparent reprieve from worse-case US tariffs.
While US President Donald Trump has so far taken a softer stance on China tariffs than expected, strategists see lingering risks that his position may become more severe at some point. At the same time, the currency remains weighed down by fundamentals including a resilient dollar and China’s wide yield discount to the US.
“We believe that Trump will eventually impose additional tariffs on Chinese imports, and this would bring volatility back to the yuan,” said Edmund Goh, investment director of fixed income at abrdn. The US dollar will stay strong, while China’s growth is likely to stay weak in 2025, he said, adding that “the difference in interest rates between the two markets remains wide.”
The more moderate stance by Trump, combined with support measures from China, has helped the offshore yuan strengthen against the greenback so far this year. But a sluggish economy and capital outflows have been weighing on the currency for months. Data released Monday showed China’s factory activity unexpectedly slowed ahead of the Lunar New Year holiday.
On Tuesday, the yuan slid 0.2% in offshore trading amid broad gains in the dollar. The move came as Trump said he would soon impose tariffs on foreign pharmaceuticals, semiconductors and metals.
The upcoming holiday, where China closes for eight days, will mean tighter liquidity and no onshore fixing rate — setting by the People’s Bank of China — setting the stage for potentially heightened volatility.
“A lack of PBOC influence during market closure means the mouse can come out and play,” said Mingze Wu, a currency trader at Stonex Financial Pte. The offshore yuan will still be traded while mainland markets remain shut. If Trump “suddenly says something bombastic, especially during the holiday period, we can expect fireworks” in the yuan.
China has previously seen big swings when traders returned after a lengthy holiday, as they catch up to global market moves and react to domestic economic developments. Such risk is significant this time around given Trump’s tendency to fire off policy announcements.
Malayan Banking Bhd is buying the dollar-offshore yuan cross on dips, according to strategist Fiona Lim, staying cautious on the yuan given the pair’s sustainable carry, US-China growth divergence and tariff risks.
“I would not say the worst is over for the yuan,” she said.
Uploaded by Magessan Varatharaja
