Traders hitch fortunes to yuan, with fixation over currency pact

Bloomberg

Traders are likely to return to work on Monday with a little less angst as the world’s biggest economies edge towards a trade deal.
All eyes will be on the yuan as the US and China discuss the critical issue of enforcement in a proposed agreement that would ensure Beijing lives up to its promise to not depreciate the currency. The discussions were extended into the weekend in search of a broad trade deal to prevent the US from increasing tariffs on Chinese goods next week.
“This follows the narrative that authorities prefer to see stability in the Chinese currency, with potential strength in the yuan being something that would be warmly received by financial markets,” said Jameel Ahmad, the Limassol-based global head of currency strategy and market research at FXTM. “It would add investor appetite back into portfolios, which generally means stronger stock market momentum and improved demand for emerging market currencies.”
“I don’t think it would be a matter of either side controlling a currency but allowing market forces to play their role” “There have not been any indications at all that China has allowed the yuan to weaken in recent months and, if anything, the narrative from China has been one of confidence in their currency and that authorities see stability in the yuan over the longer term,” said Ahmad.
Goldman Sachs Group Inc. strategists, including New York-based Zach Pandl said, “the yuan is set to trade with an “appreciation bias” in the coming months. A commitment not to competitively devalue the yuan to offset tariffs would be consistent with the existing foreign-exchange policy goals of both the US and China, and that appears to be the most likely outcome.”
“Even in the event of a more ambitious currency agreement than we expect, there are limits to the extent of likely USD/CNY downside, but a move below 6.50 is possible if policymakers were to tolerate an overvaluation similar to the 2013-2015 period,” added Zach Pandl of Goldman Sachs.