Trade tensions send yuan lower against the dollar

By William Clarke
Published: Friday, 24 May 2019

The latest round of trade talks between the United States and China have failed, pushing the yuan to its lowest level this year.

The Chinese currency is brushing six-month lows against the dollar after trade relations with the US grew frostier. 

The yuan hit a low of 6.92 to $1 on May 23, down by over 8% year on year, but has since stabilized at around 6.90 to $1 on May 24.

The downward movement in this tightly controlled currency could support Chinese mineral producers' margins, reduce dollar-denominated sales prices and ease the effect of tariffs on exporters.

The yuan began to decline against the dollar in the spring of 2018 after US President Donald Trump announced tariffs on imports of aluminium and steel in March 2018, triggering a series of tit-for-tat tariffs that have since drawn in a wide range of products.

China is a major producer of a wide range of industrial minerals, including refractory products, antimony, barite and rare earths, which leaves these markets highly exposed to the dollar-to-yuan exchange rate.

The dollar exchange rate is a key feature these markets. A stronger dollar against the yuan means that miners and producers in China can accept a lower dollar-denominated price for their exports, which makes Chinese mineral producers more competitive.

China is also a major consumer of a number of minerals produced elsewhere, including lithium, ilmenite and iodine, where a weaker yuan limits Chinese buying power.

The weakening yuan is already having an effect on domestic minerals prices in Asia, with Fastmarkets' price assessment for spot seaborne Asian antimony trioxide, min 99.5% Sb2O3 at $5,600-5,700 per tonne fob China on May 21, down from $5,800-5,900 per tonne fob the previous week.

The yuan regained some stability in 2019 concurrent with reports that trade talks were progressing, but the currency took a sharp downward turn in April 2019 after the US imposed fresh tariffs and the rhetoric between the nations became increasingly hostile.    

China’s onshore exchange rate can trade up to 2% up or down in one day in a band set by the central bank, which has given the Chinese central bank a way to counter the effect of the tariffs.

The benefits of a weaker currency for China's export market have been a particular bugbear of Trump, who has often criticized China for currency manipulation. On May 23, the US Department of Commerce issued a proposal to put penalties on countries that, "act to undervalue their currency relative to the dollar, resulting in a subsidy to their exports."

This policy appears to be squarely aimed at China, although a large number of developing countries have some form of currency peg or control.

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