May 7, 2019 / 5:00 AM / in 17 days

Yuan extends losses, market awaits China reaction to Trump's tariff threats

    SHANGHAI, May 7 (Reuters) - China's yuan weakened further
against the dollar on Tuesday as investors waited to see how
Beijing would respond to fresh tariffs threats from U.S.
President Donald Trump, which have thrown trade talks between
the two sides into doubt. 
    Markets are watching closely to see if China will still send
top negotiator Vice Premier Liu He to Washington this week for
further discussions, after Trump unexpectedly announced he will
hike U.S. tariffs on Chinese goods from Friday and impose new
levies soon.
    If Liu is part of the delegation, it could signal that
"China will make concessions," said Larry Hu, chief China
economist at Macquarie in Hong Kong.  
    "If China only sends a junior team to the U.S., the market
might have to wait longer to see who blinks first," Hu said.
    Liu is expected to be in Washington on Thursday and Friday. 
  
    Chinese investors, caught off guard by Trump's threats,
dumped stocks and sold the yuan on Monday, pushing the currency
to a 3-1/2 month low at one point. But markets were
somewhat less jittery on Tuesday, amid expectations that Beijing
would announce fresh economic support measures if the trade war
escalates.    
    Prior to the market opening on Tuesday, the People's Bank of
China (PBOC) lowered its official yuan midpoint to a
fresh 2-1/2-month low at 6.7614 per dollar,  270 pips, or 0.4
percent, weaker than the previous fix of 6.7344.
    Tuesday's official fixing was the softest since Feb. 19, and
the move was the biggest one-day weakening in percentage terms
since Feb. 11.
    But the guidance rate unexpectedly came in much lower than
market expectations. The midpoint was 97 pips weaker than
Reuters' estimate of 6.7517.
    In the spot market, onshore yuan opened at 6.7750
per dollar and was changing hands at 6.7786 at midday, 164 pips
weaker than the previous late session close and 0.25 percent
softer than the midpoint. 
    "The RMB is likely to have more near-term downside risk with
the fading of political goodwill on the currency around the
trade negotiation," Anthony Chan, chief Asia investment
strategist at Union Bancaire Privée, said in a note.
    China's foreign ministry said on Monday that its team was
still preparing to go to the U.S. for discussions and will work
for a win-win agreement for both sides.
    Stephen Innes, head of trading at SPI Asset Management, said
markets have not fully priced in the tariff hikes yet.
    "Yuan bulls need to be very cautious given the U.S.
administration might follow through on its threat to raise the
tariff on $200 billion to 25 percent, which is not priced into
the currency calculus as the imposition of these additional
tariffs could send us veering back to 6.85," he said in a note
on Tuesday.
    The global dollar index fell to 97.444 at midday,
from the previous close of 97.515. 
    The offshore yuan was trading at 6.7939 per dollar
as of midday. 

    The yuan market at 0403 GMT: 
    
    ONSHORE SPOT:
 Item               Current  Previous  Change
 PBOC midpoint      6.7614   6.7344    -0.40%
                                       
 Spot yuan          6.7786   6.7622    -0.24%
                                       
 Divergence from    0.25%              
 midpoint*                             
 Spot change YTD                       1.39%
 Spot change since 2005                22.10%
 revaluation                           
 
    Key indexes:
     
 Item            Current     Previous  Change
                                       
 Thomson         95.41       95.53     -0.1
 Reuters/HKEX                          
 CNH index                             
 Dollar index    97.444      97.515    -0.1
 
    
    
*Divergence of the dollar/yuan exchange rate. Negative number
indicates that spot yuan is trading stronger than the midpoint.
The People's Bank of China (PBOC) allows the exchange rate to
rise or fall 2 percent from official midpoint rate it sets each
morning.

    OFFSHORE CNH MARKET   
  
 Instrument            Current   Difference
                                 from onshore
 Offshore spot yuan    6.7939    -0.23%
        *                        
 Offshore              6.8155    -0.79%
 non-deliverable                 
 forwards                        
               **                
 
*Premium for offshore spot over onshore
**Figure reflects difference from PBOC's official midpoint,
since non-deliverable forwards are settled against the midpoint.
. 

 (Reporting by Winni Zhou and Andrew Galbraith; Editing by Kim
Coghill)
  
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