The dollar keeps rising against China's yuan. That's set to continue

Key Points
  • The yuan slipped against the dollar on Thursday, with some experts forecasting more weakness ahead.
  • The currency had slumped earlier this week on an escalation in U.S.-China trade tensions.
  • Apart from trade, the rate hiking from the Federal Reserve was another factor highlighted by analysts.
The Chinese yuan slumped to a five-month low as U.S.-China trade tensions intensified earlier this week.
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The Chinese yuan softened again on Thursday, giving back of all of its gains made this year, and could be headed for more weakness by year-end.

The currency's move lower came after it sank earlier this week amid fears about the U.S.-China trade dispute. Looking ahead, investors remain nervous, Nizam Idris, head of strategy, fixed income and currencies at Macquarie, told CNBC, citing the difference between traders' prices and the People's Bank of China official price level.

He said he was watching the spread as an indicator of market sentiment rather than where the central bank was deciding to fix the yuan mid-point.

"The spread between the spot yuan and the fixing has widened sharply. So what it means to me is that the PBOC is fixing dollar/yuan low, just to instill some sense of stability and strength. Meanwhile, I think locals and investors are pulling their money out of China to the extent that dollar/yuan spot is rising," the strategist told CNBC's "Squawk Box."

The spread as of Tuesday was at its widest since August 2015, he said, adding in a note that "[f]urther widening of the spot-fixing spread could sour sentiment, regardless of a lower than expected dollar/yuan fixing."

The on-shore yuan traded at 6.5001 to the dollar at 3:18 p.m. HK/SIN Thursday, after slipping as low as 6.5074 earlier in the day. In the offshore market, where the currency is less tightly controlled, the yuan traded at 6.5074 to the dollar.

Ahead of the market open, the PBOC had set the yuan mid-point at 6.4706 to the dollar. The central bank allows the yuan spot rate to rise or fall as much as 2 percent against the dollar, relative to its official fixing.

The PBOC is fixing dollar-yuan low to project 'stability': Strategist
The PBOC is fixing dollar-yuan low to project 'stability': Strategist

The yuan gave up all of its gains made this year during Asia afternoon trade as the greenback continued to strengthen. The currency had been up around 0.3 percent against the dollar for the year earlier in the morning. Before giving up those gains, the yuan had been one of only two Asian currencies, excluding the Japanese yen, that were higher this year.

That came after the central bank on Wednesday set the midpoint more than 0.5 percent below the previous day's fix, at 6.4586 per dollar. Despite the lower fix, the mid-point was still stronger than analysts had expected, according to Reuters.

The move was interpreted as an attempt to calm nerves on the back of an elevation of U.S.-China trade tensions after U.S. President Donald Trump issued new tariff threats.

Trump had on Monday requested the U.S. Trade Representative to identify $200 billion in Chinese products that could be subject to an additional 10 percent tariff. China responded that it would retaliate with countermeasures if Washington went ahead with its threats.

That comes as other emerging market currencies have slumped on the back of a strong dollar as the Federal Reserve progresses with monetary policy normalization.

Although things were looking "pretty hunky dory" for most countries coming into the year, there have since been significant changes to the global outlook and monetary policy divergence, said Philip Wee, a foreign exchange strategist at DBS Bank.

Sue Trinh, head of Asia foreign exchange strategy at RBC Capital Markets, said there was room for the yuan to depreciate against a basket of currencies because of growing policy divergence.

For his part, Wee has a year-end target of 6.60 for the yuan.