Yuan eases as Trump's Hong Kong remark complicate trade

The Yuan edged lower on Thursday as optimism around recovering U.S.-China trade relations waned with no clear signs of fresh progress, keeping the currency in a tight range.

Complicating the negotiations, U.S. President Donald Trump on Wednesday tied protests in Hong Kong to a trade deal with China, urging Beijing to seek a humane resolution to the city's months-long political crisis.

His remarks on Twitter came after the U.S. State Department said it was "deeply concerned" about Chinese paramilitary forces' movements near the financial hub.

The comments dampened sentiment in the yuan, which hit a one-week high on Wednesday after Trump held off 10% tariffs on over $150 billion worth of Chinese imports, shortly after top U.S. and Chinese trade officials spoke on the phone.

The spot market traded at 7.0295 per dollar at midday, 45 pips away from the previous late session close and 0.04 percent weaker than the midpoint, which was set by the People's Bank of China at 7.0268 prior to market open. The offshore yuan was trading 0.19 per cent softer from the onshore spot at 7.043 per dollar.

"Of course this is not good for the trade talks. There's a lot of geopolitical risk and uncertainty," a Shanghai-based trader said of Trump's comments on Hong Kong.

Also weighing on the yuan was U.S. Commerce Secretary Wilbur Ross' remarks on Wednesday noting that China made no trade concessions - even though Trump said he expects his goodwill to "be reciprocated".

"The tariff delay actually wasn't that substantial. I think the market reaction was too optimistic," said a second Shanghai-based trader at a foreign bank.

But Bruce Yam, Hong Kong-based forex strategist at brokerage Everbright Sun Hung Kai, said expectations that the PBOC will intervene to stop any rapid depreciation were supportive for the yuan.

"The yuan falling too fast will put pressure on China's foreign currency debt, so they (PBOC) won't let the yuan fall too fast," he said. The analyst sees a floor at around 7.2 per dollar if the trade talks again turn sour.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 92.25, weaker than the previous day's 92.36.

The global dollar index fell slightly to 97.933 from the previous close of 97.987. Offshore one-year non-deliverable forwards contracts (NDFs) - considered the best available proxy for forward-looking market expectations of the yuan's value - traded at 7.0987, 1.01 per cent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 4:01AM GMT: ONSHORE SPOT: Item Current Previous Change PBOC midpoint 7.0268 7.0312 0.06% Spot yuan 7.0295 7.025 -0.06% Divergence from 0.04% midpoint* Spot change YTD -2.23% Spot change since 2005 17.74% revaluation Key indexes: Item Current Previous Change Thomson 92.25 92.36 -0.1 Reuters/HKEX CNH index Dollar index 97.933 97.987 -0.1* Divergence of the dollar/yuan exchange rate.

The People's Bank of China (PBOC) allows the exchange rate to rise or fall 2 per cent from the official midpoint rate it sets each morning. OFFSHORE CNH MARKET Instrument Current Difference from onshore Offshore spot yuan 7.043 -0.19%* Offshore 7.0987 -1.01% non-deliverable forwards.

(A negative number indicates that spot yuan is trading stronger than the midpoint)

*Premium for offshore spot over onshore **Figure reflects difference from PBOC's official midpoint since non-deliverable forwards are settled against the midpoint.