Yuan dips from 3-week high as tariffs weigh on sentiment

Yuan slips: China's Yuan softened on Tuesday after a five-week upward trend against the Dollar began to falter, with traders anticipating the currency may stabilise within a new range until there are signs of economic improvement.

By late Tuesday morning in Asia, the Yuan was trading at 7.1277 per Dollar, down from Monday's three-week peak of 7.1135. Offshore, the Yuan stood at 7.1271.

July's industrial profit growth showed a slight acceleration according to official data released on Tuesday, but earlier figures from August had indicated a slowdown in exports.

Canada's tariffs hit exports

Adding to the pressure, Canada announced a 100 per cent tariff on Chinese electric vehicles and a 25 per cent tariff on steel and aluminium, further dampening market sentiment, particularly as exports remain a crucial support for China's slowing economy.

Despite these headwinds, the yuan has gained 1.3% against the dollar this month, largely due to the dollar's broader decline in anticipation of US interest rate cuts.

Analysts at UOB said that it would be significant if the Dollar fell below offshore Yuan support levels of 7.0835 and 7.0636. In the near term, they expect the yuan to trade within a range of 7.1150 to 7.1350.

As the Dollar weakened across the board, currencies of several of China's trading partners rallied, leading to a decrease in the yuan's trade-weighted value.

The official trade-weighted index lost its gains for the year and stood at 97.89 as of its last update on Friday. Against the Euro, Yuan was trading at 7.9558, near the lower end of a range it has maintained for a year.

"A declining trade-weighted CNY aligns with the PBOC's easing monetary policy," said Alvin Tan, a strategist at RBC Capital Markets.

PBOC sets weaker midpoint

Ahead of the market opening, the People's Bank of China set the midpoint rate, which allows the Yuan to trade within a 2 per cent band, at 7.1249 per Dollar, slightly weaker than Reuters' estimate.

Yields on Chinese government 10-year bonds rose 0.2 basis points to 2.17 per cent. The yield on equivalent US government debt was 3.8 per cent. The Dollar's index against six major currencies stood at 100.88, down 3 per cent in August.