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China's yuan nears a critical juncture as trade talks loom

Hong Kong

THE yuan is entering a critical period after posting its second-best monthly advance ever, with analysts sounding caution as a new round of China-US trade talks gets underway.

The Chinese currency could head to 7 per dollar if there's a breakdown in the negotiations, while an agreement on no additional tariffs will send it on a sustained rally, Citigroup Inc said. An extension of the trade truce with little meaningful progress on underlying issues may disappoint and pressure the yuan, Bank of America Merrill Lynch strategists led by Adarsh Sinha wrote on Feb 11.

It's been a roller coaster for the yuan this year: the currency surged 2.6 per cent in January on the back of a sliding dollar and then gave up about half those gains in just two sessions. Chinese Vice-Premier Liu He will join US Treasury Secretary Steven Mnuchin for trade talks in Beijing later this week, before a possible meeting between presidents of the two nations soon. President Donald Trump said the March 1 deadline to raise tariffs on Chinese products may be extended if the sides are near a deal.

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"The yuan has been tracking the dollar as it's not the best time to place large long or short bets on the currency due to uncertainty over the trade talks," said Carie Li, an economist at OCBC Wing Hang Bank in Hong Kong. "The yuan may advance if a partial deal is reached. But in the coming two to three months, it will trade between 6.7 and 6.9 because of weaker fundamentals and narrowing China-US rate differentials."

Here's what some other strategists are saying: The currency's recent rally was a "false dawn," and it will slide to 7 by the end of this year amid slower growth and policy easing, according to Deutsche Bank AG.

Bloomberg Economics expects the yuan to be buffeted by a range of forces this year, including the trade war and an uncertain outlook, and that heightened volatility could mean downward pressure prevails with big swings likely. The yuan is "in for a bumpy ride this year", economists Chang Shu and David Qu wrote.

Australia & New Zealand Banking Group expects more volatility, with senior strategist Irene Cheung saying the currency could move between 6.6 and 6.95 in the near term.

Mr Mnuchin said last month that the exchange rate could be "one of the important issues" during discussions. Mr Trump has been a long-time critic of China's foreign-exchange management, saying during his election campaign that the nation was a "grand master level" currency manipulator.

For Michelle Lam, a greater China economist at Societe Generale SA in Hong Kong, China will want to avoid rapid appreciation of the yuan as it looks to liberalise the currency and ensure a steady exchange rate to lure foreign inflows into the country's bond market.

The yuan rose 0.16 per cent to 6.7610 per dollar as at 4.57 pm on Wednesday in Shanghai. The currency lost 1.4 per cent the first two sessions of February. The offshore yuan last traded at 6.7700.

"No one can clearly tell where the yuan will go after March 1," said Larry Hu, head of China economics at Macquarie Securities Ltd. "But the dollar won't likely be very strong this year; I expect the yuan to remain largely stable."  BLOOMBERG