China’s yuan weakened to a three-week low against the greenback in the first trading session after the meeting between U.S. President Donald Trump and Chinese leader Xi Jinping, as the dollar strengthened amid reinforced expectations of further U.S. rate hikes. But there was no panic selling in the Chinese currency as signs of stabilization in China’s foreign exchange reserves underline Beijing’s success in stemming capital outflows.
The People’s Bank of China set the midpoint rate at 6.9042 per dollar prior to market open, weaker than the previous fix of 6.8949. The spot market opened at 6.9066 per dollar with the currency changing hands at 6.9068 at midday, 58 pips away from the previous late session close. The Trump-Xi meeting appears to have had little impact on the forex market. Singapore’s OCBC Bank said the meeting “is more about building a personal relationship,” and that the message on trade policy is a bit confusing.
The yuan’s weakness comes as the dollar index, which tracks the greenback against six major rival currencies, rose to three-week highs after a key U.S. Federal Reserve official reinforced the central bank’s commitment to interest rate hikes. Higher U.S. rates would make dollar assets more attractive.
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But Wang Peng, economist at China Development Bank Securities, said the dollar index may peak next year, potentially reversing expectations that the yuan will depreciate further. “Yuan has already stabilized a lot against the dollar this year, and market expectations are starting to change,” Wang said, ruling out the possibility of another big drop this year, following the yuan’s 6.5 percent slump in 2016.
Reflecting a change in market outlook, yuan has been changing hands this year at a stronger level in the offshore market than in the onshore market, reversing a pattern last year, he said.
Also showing reduced depreciation pressure, China’s forex reserves stayed above $3 trillion in March, marking the first time reserves had increased two consecutive months since April 2016. “Since China strengthened controls on capital outflows at the start of 2017, the supply-demand relationship in the forex market has basically been in equilibrium,” Tommy Xie, economist at OCBC Bank said in a note.