By William Watts, MarketWatch
The number 7 is getting a lot of attention as the U.S.-China trade war persists.
It’s all about China’s currency and what many investors and economists have dubbed a “line in the sand” or a “magic number” at seven yuan-per-dollar. A weakening of the renminbi that would see the dollar fetch more than that, some observers fear, would mark another negative turn in the trade fight, sparking U.S. accusations of currency manipulation and potentially sparking a broader, global race to the bottom as other countries move to weaken their currencies in response.
“With trade-talk angst and global growth concerns taking center stage, the question of where the yuan goes from here may be the most important macro issue confronting the global markets today,” wrote analysts at Montreal-based Pavilion, in a May 30 note.
Watching the line
For its part, China’s central bank has appeared intent on keeping the yuan away from that line. On Tuesday, the People’s Bank of China set the midpoint of the yuan’s /zigman2/quotes/210561991/realtime/sampled USDCNY 0.0000% trading range versus the dollar at CNY6.8942, little changed from CNY6.8940 a day earlier. The PBOC publishes a level for the dollar-yuan exchange rate each day, around which the pair can trade in a set range.
In offshore trade, the dollar on Tuesday fetched 6.9021 /zigman2/quotes/210561989/realtime/sampled USDCNH +0.0001% , down 0.4%. The dollar has rallied nearly 7% versus the yuan in the offshore market over the past 12 months.
China’s slowing economy and fears that trade tensions could bring more headwinds are seen putting downward pressure on the yuan. But the temptation to add to the weakness in an attempt to further offset tariffs and threats of further levies might run strong.
But why is 7 so important? There’s no clear-cut answer. The level seems to have taken on important psychological significance by the fact that the dollar hasn’t traded above 7 yuan since the financial crisis.
As a result, the level “seems to be an inflection point” and a violation of it would be seen running the risk of angering the Trump administration and undercutting China’s longstanding efforts to raise the status of its currency, said Carl Mastroianni, portfolio specialist at Insight Investment, a global asset manager with $840 billion in assets under management, in an interview.
For now, China’s central bank seems intent not to test that hypothesis, maintaining fixings below 6.9 yuan to the dollar.
For most of May and so far this month, those currency fixes at the midpoint have tended to set the yuan at a stronger rate than market participants have anticipated. Analysts have viewed that as a signal that Beijing wants to keep a tight rein on the currency and prevent it from sliding too fast, even if economic fundamentals warrant a decline.
’Just another number’
But there’s no guarantee that the PBOC will prove averse to holding the USD/CNY rate below 7 forever.
Analysts at UBS last week argued that the mark at 7 “should be viewed as just another number.”