Chinese yuan likely to rally, recoup some losses if U.S.-China trade tensions deescalate: Scotiabank

The Chinese yuan is expected to rally and recoup some of its losses if the US and China can deescalate their trade tensions and reach a trade deal. However, it is less likely to materialize any time soon, according to the latest research from Scotiabank.

As the onshore USD/CNY spot has been closing well above the same day’s fixing persistently, the yuan is facing continued and increasing depreciation pressure amid China’s narrowing yield advantage over the US and deteriorating ties between the world’s two largest economies.

In addition, it appears the US Treasury Department is increasingly likely to label China a currency manipulator in its upcoming FX policy report due mid-October. In the history, it was the usual response that the alleged "manipulators" took action to revalue (appreciate) their own currencies in order to be removed from the Treasury’s list. However, it could be different this time.

"In our opinion, it will dent market sentiment and undermine the yuan amid worsening US-China tensions, if the US Treasury Department decides to designate China a currency manipulator," the report commented.