The offshore yuan strengthened to around 7.2 per dollar on Tuesday, reversing losses from the previous session, as investors appeared to shrug off disappointing PMI data and renewed trade tensions between China and the United States.
Offshore yuan firms despite headwinds
A private survey revealed that China’s manufacturing activity unexpectedly contracted in May for the first time in eight months and at its fastest pace since September 2022. This sharp decline, which aligns with the official PMI figures released over the weekend showing factory activity shrinking for a second consecutive month, highlighted the growing headwinds facing China’s industrial sector amid escalating trade frictions.
These weak manufacturing indicators underscored the increasing impact of U.S. tariffs on Chinese exports and have intensified calls among economists and policymakers for stronger stimulus measures to bolster economic growth. Despite these challenges, the offshore yuan managed to gain ground, reflecting a degree of market resilience and expectations that Beijing may soon introduce targeted fiscal or monetary support to offset the slowdown.
Diplomatic tensions flared
At the same time, diplomatic tensions flared as China firmly denied U.S. accusations of violating a temporary trade agreement, instead accusing Washington of breaking the deal first. This exchange marked a significant deterioration in relations, raising concerns about the prospects for a near-term resolution to the trade dispute. However, amid these pressures, markets found some cautious support from speculation that Presidents Trump and Xi Jinping might engage in a phone call later this week. The possibility of high-level dialogue has helped sustain a fragile optimism among investors, who are hoping for at least a temporary thaw in the trade conflict.
Overall, the yuan’s modest rebound amidst these mixed signals reflects the complex interplay between economic fundamentals and geopolitical dynamics. While the outlook for China’s manufacturing sector remains challenged by external tariffs and slowing global demand, currency traders seem to be balancing these risks against the potential for policy easing and diplomatic progress. Investors will likely remain vigilant in the coming days, closely watching for any concrete developments in both trade negotiations and domestic stimulus efforts that could influence the yuan’s trajectory.
