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Chinese yuan surged past 7 per USD for first time since August as trade tensions ease

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Chinese yuan surged past 7 per US dollar mark for the first time since August, as signs of easing trade tensions between China and the US boosted market sentiment.

The offshore yuan rallied as much as 0.5 per cent to hit 6.9962 per dollar on Tuesday, following weakening US dollar and signs that China and the US are on track to de-escalate a protracted trade tensions. The onshore yuan strengthened by as much as 0.46 per cent to 6.9980 per dollar.

Investors are looking for confirmation that China and the United States are closer to a “Phase One” trade deal. US Commerce Secretary Wilbur Ross said Sunday the nations were “making good progress” and an agreement could be signed this month. China’s official Xinhua news agency said the two sides have reached consensus after talks between their lead trade negotiators on Friday.

It’s reported that China is reviewing locations in the US where President Xi Jinping would meet with Donald Trump to sign the phase one trade deal.

“The yuan will remain strong,” said Alan Yip, senior FX market strategist at the Bank of East Asia. “Investors are betting both sides will sign the trade deal in November. When they sign the deal, the yuan may reach 6.95.”

The offshore yuan breached its 100-day moving average on Monday for the first time since May. Stronger daily fixings from People’s Bank of China have also helped boost sentiment for the currency: the onshore yuan can trade 2 per cent either side of the fixing.

In addition, PBOC announced last Friday that it will see a total of 30 billion yuan (US$4.3 billion) in yuan-denominated securities sold in Hong Kong this week.

It’s a widely used method to push up investors’ borrowing costs, making it more expensive for speculators to shorting the yuan. The auction on Thursday will include 20 billion yuan (US$2.8 billion) of three month securities and 10 billion yuan of one-year securities.

“The delay of new tariffs will help alleviate the pressure for the renminbi to weaken but it’s not enough to drive the currency higher significantly,” said Zhou Hao, a senior economist at Commerzbank in Singapore.

Zhou said market sentiment on the yuan had improved, resulting in a repositioning of its outlook.

However, market watchers are still cautious on the yuan’s recent strength and noted that the currency can’t rise substantially unless existing tariffs on Chinese goods are reversed.

Serena Zhou, an economist at Mizuho Securities in Hong Kong, said the sale of securities in Hong Kong is one of the tools the PBOC uses to stabilise the currency, in addition to the use of its countercyclical factor in calculating the daily trading range midpoint and official comments to manage market expectation.

However, “Beijing is unlikely to allow a large appreciation as demanded by Washington, due to its fear over the adverse economic impact that the 1985 Plaza Accord imposed on Japan,” she said. “They could just agree on more fair and transparent market operations.”

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