Via Financial Times

China’s currency has gained further momentum — wiping out the heavy losses it took over the summer — amid cooling tensions between Beijing and Washington.

The renminbi rallied as much as 0.5 per cent against the US dollar, crossing the Rmb6.9 mark for the first time since August and bringing its rise for 2020 to nearly 1 per cent. Its climb in the early days of this year highlights the upbeat sentiment among global investors and cautious optimism of an improvement in relations world’s two biggest economies.

The currency in August faced its worst sell-off in a quarter century and eventually slumped to nearly 7.2 to the US dollar in a fall that ricocheted across world markets. Traders and investors closely watch the currency as a broader market bellwether to which movements in many other assets are often closely tied, according to analysts.

The gains on Monday came days before the planned signing of a trade pact in Washington by US and Chinese officials, scheduled for Wednesday, that will help lock in the terms of a limited agreement reached last month. Although details on further concessions by both sides are scarce, the signing will at least prevent further levies on Chinese imports from being introduced by the US, which will also halve tariffs on $120bn of imports imposed in September.

Line chart of Renminbi per dollar showing Renminbi claws back losses from August trade tensions

The renewed strength for the renminbi on Monday was despite broad stability for the greenback, with the dollar index tracking the US currency against a basket of peers essentially flat on the day. The offshore renminbi, which is not bound by the Chinese central bank’s trading band, was also back below the Rmb6.9 per dollar mark, having firmed 0.2 per cent on Monday to 6.8947.

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“Obviously the market is focused on the phase one agreement”, said Mansoor Mohi-uddin, senior macro strategist at NatWest Markets, pointing to renewed strength in both the onshore and offshore rates since markets opened in 2020.

China’s central bank has been setting its daily midpoint level around which the currency is allowed to fluctuate gradually firmer since the trade truce was announced around a month ago. Still, the currency is about 7.5 per cent weaker compared to its level from shortly before the first tariffs were imposed by the US in June 2018.

Plans by the administration of President Donald Trump for a new forum for economic dialogue with China helped to reinforce that message with the prospect of a return to the strategy of engagement preferred by previous US presidents.

But Mr Mohi-uddin added that short-term seasonal factors were partly behind the Chinese currency’s early hot streak.

Chinese corporations with dollar holdings, he said, often sold these to buy more renminbi at the start of the year in order to pay bonuses to workers ahead of the Chinese new year, which occurs later this month.

“That’s occurring now and helping push the dollar down against [the renminbi] irrespective of trade talks,” he said.