(Bloomberg) — China’s yuan rallied past 7 per dollar only yesterday and analysts are already warning the strength won’t last.
The currency jumped as much as 0.60% to 6.9880 a dollar Tuesday, trading stronger than the key level for the first time since August. The offshore rate rose as much 0.66%. The level had been a key support for the currency for years until August, when the central bank allowed it to weaken past 7 for the first time in more than a decade.
China’s yuan has proven to be a good barometer of progress in trade talks between Beijing and Washington. Its surge in the past month came as the two sides inched toward a deal and the greenback weakened. Still, the latest gains coincide with China’s slowest economic growth since the early 1990s — a factor that prompted the central bank to lower one of its many interest rates on Tuesday.
“The yuan’s rally above 7 will only be temporary,” said Commerzbank (DE:CBKG) AG’s Zhou Hao, the top yuan forecaster. “The MLF cut shows the Chinese central bank may see a strong currency as harmful to the economy.”
Zhou also pointed to the People’s Bank of China’s daily reference rate — which was set weaker-than-expected in the four sessions through Tuesday — as a factor limiting more gains. The fixing has been closely watched after the PBOC set it weaker than 7 per dollar in August, shattering a psychological barrier that officials had spent years defending.
The central bank set the daily reference rate at 7.0080 on Wednesday, slightly stronger than predicted. The offshore yuan gained 0.05% to 6.9989 after the fixing.
The Chinese currency has now rebounded 2.4% since it fell to the weakest level since 2008 in early September. U.S. Commerce Secretary Wilbur Ross said Tuesday that reaching a phase-one deal will help rebuild trust between the two sides and could serve as a precursor to more talks.
“The easing trade tensions helped to override the downside surprises seen in the dreary China domestic economic data and have contributed to a convincing rally on the yuan,” said Stephen Innes, a strategist at AxiTrader Ltd.
While Citigroup Inc (NYSE:C). strategists say the yuan might strengthen toward 6.9 if Washington agrees to roll back tariffs imposed on Chinese goods in September, Li Liuyang, an analyst at China Merchants Bank Co. said doubts will remain until a deal has been finalized.
Societe Generale (PA:SOGN) SA’s Jason Daw says the yuan is more likely to weaken to 7.2 in the coming months, rather than strengthen to 6.8. That means there’s no point chasing the rally now, he wrote in a Wednesday note.
The median forecast of analysts surveyed by Bloomberg is for the yuan to end the year at 7.15.
(Adds analyst comment in second-to-last parapraph)