What to watch to keep track of the Yuan - Bloomberg

According to Bloomberg, the Chinese Yuan will continue to rise or fall according to economic figures for China, but those figures are looking arguably better than the common trade war headlines would lead many to believe.

Key quotes

"The yuan, Asia’s worst performing currency after a falling more than 6 percent since June, will likely be supported by an improvement in the economy through year-end and an inflow of money as foreign investors buy onshore bonds. In addition, capital controls and the still-growing foreign exchange reserves should provide support.

The central bank is also expected to continue with monetary easing, which should help support the economy via cheaper money. In the short run though, with the U.S. raising rates, there’s a risk that the stimulus may weaken the currency and make yuan assets less attractive relative to those denominated in the dollar.

Investment and consumption will both rebound toward year-end, according to economists surveyed by Bloomberg. The nation’s senior leaders have signaled more support for economic growth, with greater emphasis on infrastructure construction. That’s in addition to tax cuts and the open market injections of cash by the central bank.

Overseas funds will keep snapping up assets, because Chinese bond yields are higher and the hedging costs for the yuan will remain low, according to Ken Peng, an investment strategist at Citi Private Bank in Hong Kong. That will help to offset capital outflows and cushion the currency as the trade war simmers, he added.

Onshore investors aren’t dumping yuan for foreign-exchange holdings, a popular trade a few years ago that sparked capital outflows and tighter regulations, according to data from China’s top currency market watchdog.

In the aftermath of 2015’s surprise devaluation to stabilize the yuan and stem outflows, policy makers burnt through hundreds of millions in foreign reserves, but that isn’t happening now. China’s foreign-exchange reserves unexpectedly rose for a second straight month in July to $3.12 trillion.

However, the nation’s competitive advantage in global trade has become less supportive for the currency. The current account fell to a $28 billion deficit in the first six months of this year, the first half-year shortfall since the data began in 1998. A shrinking goods trade surplus, rising services deficit, and foreign companies moving profits out of China all play a part in the shortfall."