China's yuan slips to 2-year low versus peers after Trump-Xi call leaves issues unresolved

The Chinese yuan weakened against the dollar and fell to a near two-year low against major trading partners following a call between Presidents Trump and Xi, which, while described as positive by Trump, left key trade and Taiwan-related issues unresolved. Analysts remain skeptical, suggesting the call was primarily to address pressing issues without a clear path to tariff reductions or a comprehensive deal, as evidenced by the onshore yuan closing down 0.08% at 7.1847 per dollar. Investors are now focusing on upcoming Chinese economic data releases to assess the impact of trade tensions on the broader economy.

Analysis

The Chinese yuan experienced downward pressure against the U.S. dollar and reached a near two-year low against its major trading partners following a high-level call between U.S. President Trump and Chinese leader Xi Jinping that failed to resolve key trade and geopolitical tensions. Despite President Trump's characterization of the talks as yielding a "very positive conclusion," particularly regarding rare earth products, market participants and analysts, such as Gary Ng of Natixis, remain skeptical, perceiving the dialogue as a measure to buy time rather than a definitive step towards comprehensive tariff reductions. This skepticism was reflected in the onshore yuan's performance, which closed at 7.1847 per dollar, a decline of 0.08%. While the People's Bank of China (PBOC) set the midpoint rate at 7.1845 per dollar, stronger than Reuters' estimate of 7.1935, the CFETS yuan index, measuring the currency against a basket of 25 trading partners, tellingly fell to 95.58, marking a 5.8% year-to-date decrease. This contrasts with the spot yuan's 1.6% appreciation against the dollar over the same period, highlighting a broader underlying weakness of the yuan against its global peers despite its comparative resilience against the USD. Traders attributed market caution to policy unpredictability, with investor focus now shifting to upcoming Chinese economic data, including inflation and trade figures, to gauge the tangible impact of ongoing trade frictions on China's economy, which is already contending with deflationary pressures and subdued domestic demand.

Key Decisions for Investors

• Investors should maintain a cautious outlook on yuan-denominated assets and exposures sensitive to U.S.-China trade relations due to the unresolved nature of key disputes and persistent market skepticism following the latest leadership dialogue.
• Closely monitor upcoming Chinese economic data, specifically inflation and trade statistics, for further indications of the trade war's impact on the Chinese economy and potential shifts in currency dynamics.
• Evaluate the divergence between the yuan's performance against the U.S. dollar and its weaker trend against the broader CFETS currency basket, as continued depreciation of the trade-weighted index could signal deeper economic strain or a subtle policy adjustment by Beijing despite managed stability against the dollar.