As tensions escalate between the U.S. and China, the yuan is back in the spotlight. Despite a weaker U.S. dollar index (DXY), the offshore yuan (USD/CNH) surged, pushing expectations for Wednesday’s USD/CNY fix higher—potentially toward 7.3420. To avoid an abrupt market reaction, the People’s Bank of China (PBOC) is expected to apply another heavy “damping” offset—possibly more than -1400 pips—following Tuesday’s already notable -1300 pips adjustment. The fix suggests Beijing is still trying to present a steady hand, even as market forces push the yuan lower.
At the heart of the pressure is Trump’s latest tariff salvo, threats of another 50% tariff on the table. China’s response has been firm, launching a dispute at the World Trade Organization and vowing to “fight to the end” against what it calls U.S. blackmail. While Beijing continues to signal it doesn’t want to weaponize the yuan—citing concerns over spooking foreign investors—the threat of a currency war is no longer unthinkable.
For now, China is leaning on other tools. Policymakers have ramped up support for equities, with regulators lifting limits on insurance fund investments and state entities signaling their intention to buy stocks. The Shanghai Composite inched up just 0.3% on Tuesday, trailing regional peers, but the moves show an effort to stabilize sentiment ahead of a key Politburo meeting expected later this month. Should market stress persist, stimulus measures could be fast-tracked.
Still, the risk remains that if tariff escalation continues, Beijing may be forced to reassess its stance on the yuan. A significant devaluation would mark a turning point in global currency markets—potentially triggering a domino effect as other countries move to defend their own export competitiveness. For now, the yuan holds the line, but the pressure is unmistakably building.
—
Stay tuned for the modelled estimate for the central rate,. to which that big dampening its expected to be applied
This article was written by Eamonn Sheridan at www.forexlive.com.