SHANGHAI/HONG KONG: The yuan raced to its strongest against the US dollar since July today after the United States dropped its designation of China as a currency manipulator, in a further sign of easing tensions in the countries’ trade war.

But the currency pared some of its gains in the afternoon as traders took profits, believing that most of the good news from trade talks between Washington and Beijing has been priced in.

The onshore yuan ended domestic trading at 6.8854 per dollar, 0.1% firmer than Monday’s late-night close. It was the strongest domestic session close since July 30, 2019, but weaker than a six-month peak of 6.8661 per dollar achieved earlier in the session.

The offshore yuan gave up all of its intraday gains to weaken 0.1% to 6.8879 per dollar as of 0832 GMT, retreating from a five-month top of 6.8662 per dollar hit in the morning.

The Chinese currency was on a tear early today after the US Treasury – which slapped the manipulator tag on China at the height of the trade dispute last August – scrapped the label as a Chinese delegation arrived in Washington for the signing of the Phase 1 deal.

“While the labelling led to an escalation of US-China tensions, we think the de-labelling has sweetened the ‘Phase 1’ deal, ensuring its eventual signing,” Citi said in a note.

China’s Foreign Ministry said during the afternoon session that the country would keep its currency basically stable.

The yuan is up 1.1% so far this month amid easing trade tensions, and could be in for further strengthening as attractive valuations for Chinese assets boost global demand for the tightly managed currency.

Stocks in Shanghai are up almost 1.9% this month, extending 6.2% gains in December on the back of trade talk optimism. Hong Kong shares also rose in tandem with the yuan.

Citi’s analysts said in a note that they foresee further strength in the Chinese currency with US President Donald Trump’s promise to start the next phase of negotiations soon, “which would attract more bond and equity inflows”.

Yuan bulls may be encouraged by the central bank’s apparent reluctance to curb strength in the currency, said a Shanghai-based trader. Before the start of trade, the People’s Bank of China fixed the yuan’s trading-band midpoint at its firmest in more than five months.

Several traders in Shanghai said they doubted if the rally has more room to run.

“Support from this phase of the trade deal has already materialised, hence there’s some profit taking going on this afternoon,” said a senior trader at a foreign bank in Shanghai.

Another trader at a Chinese bank said the yuan strengthened beyond a technical level today and triggered the squaring of positions, taming the currency’s strength.

“Recently the renminbi has been overbought … there would not be better news (than trade truce) before the start of Chinese New Year” at the end of the month, a third trader said, using another name for the Chinese currency.

Economic headwinds and external uncertainties such as the US presidential election could keep the yuan within the range of 6.8 to 7.1 per dollar this year, Wang Tao, chief China economist at UBS, said at a conference.

China may post its slowest economic growth in 30 years in 2020 as domestic and global demand remain sluggish, according to a poll of 83 economists by Reuters today.

“When the economy slows down further after a brief debt-driven improvement in Q1, USD/CNY will regain the upside traction,” Rabobank said in a note. – Reuters