Yuan Softens as Caution Prevails Before High-Stakes US-China Trade Talks
China’s yuan edged slightly lower against the US dollar on Tuesday as investors adopted a wait-and-see approach ahead of the outcome of a pivotal round of US-China trade negotiations being held in London.
Top officials from both nations reconvened for a second day of talks in an effort to defuse rising tensions over export controls on rare earth elements—critical to industries ranging from electronics to clean energy.
Markets Wait for Clarity
“Volatility is subdued as markets are bracing for the outcome of trade talks,” noted a trader at a global bank. “There’s little directional conviction right now.”
The spot yuan opened at 7.1808 and last traded at 7.1840, roughly 55 pips weaker than the previous close. The People’s Bank of China (PBOC) set the midpoint fixing at 7.1840, 13 pips stronger than Reuters’ estimate and the firmest since May 26, suggesting the central bank remains keen to manage depreciation pressure carefully.
The yuan is allowed to trade within a 2% band on either side of the official midpoint. The offshore yuan (CNH) was slightly firmer at 7.1832, up 0.03%—a sign of guarded optimism in global markets.
Rare Earths and the Bigger Game
This round of talks centers around export restrictions on rare earths, with Beijing reportedly offering only limited concessions in exchange for potential US tariff relief or eased export controls.
According to Citi analysts, China’s commanding 70%-90% control over global rare earth supply gives it leverage in negotiations, particularly as global industries remain dependent on these materials.
The global supply chain—already under strain from pandemic-era disruptions and ongoing geopolitical uncertainty—could face a new shock if the talks break down, exacerbating inflationary pressures and slowing growth.
Currency Dynamics and Dollar Strength
The US dollar index rose 0.25% to 99.22, reflecting modest strength against major currencies. Although the dollar is still close to the six-week low it touched last week, investors appear to be favoring safe-haven positions ahead of potentially market-moving headlines from London.
The yuan’s movement reflects this broader risk sentiment, with traders reluctant to take bold positions until greater clarity emerges.
Meanwhile, the Hong Kong dollar (HKD) slipped toward the weaker end of its trading band, hitting 7.8485 per US dollar, as capital flow dynamics and rate differentials continued to apply mild depreciation pressure.
Outlook: All Eyes on Diplomacy
The yuan remains rangebound for now, but geopolitical developments could quickly alter the outlook. The recent phone call between Presidents Xi Jinping and Donald Trump, after a resurgence of accusations from both sides, has highlighted the fragility of current agreements.
If the talks yield a constructive outcome, the yuan could stabilize or even firm slightly on renewed confidence. However, failure to de-escalate tensions or any imposition of fresh restrictions may trigger capital outflows and intensify PBOC intervention.
Until then, caution and narrow trading bands will likely define yuan trading, with broader dollar dynamics and geopolitical risk acting as key drivers.
