(Bloomberg) -- A recent slide that sent the yuan to a decade low will probably be short-lived.
That's because a key political event -- the 70th anniversary of the People's Republic of China's founding -- is on Oct. 1, giving officials a reason to stabilize the exchange rate in the next few weeks. Traders are pricing in muted swings in the yuan, with a gauge of expected volatility touching the lowest in more than two weeks on Thursday.
The yuan has tumbled 1% over the past seven sessions, the worst performance in Asia, as uncertainty over the trade dispute with the U.S. lingers. To boost sentiment, the central bank has set stronger-than-expected fixings for three straight days. The yuan's funding costs spiked in Hong Kong recently, stoking bets China is tightening liquidity to squeeze bears.
“The yuan won't be highly volatile in the near term,” said Ken Peng, a Hong Kong-based investment strategist at Citigroup Inc., who cited the coming anniversary as a key reason. “Policy makers have made their stance very clear by issuing stronger-than-expected fixings, so traders won't want to stick their heads out as the authorities may just cut them off.”
Read a QuickTake on the tools China uses to manage the yuan
China has a history of supporting the yuan before major political events, such as leaders' visits to the U.S. and the annual meeting of the National People's Congress. Sustained declines risk creating a vicious cycle of capital outflows and even sharper drops in the currency -- a scenario policy makers want to avoid because it could destabilize financial markets and derail talks with the U.S.
A worsening of China-U.S. tensions between now and Oct. 1 would likely send the yuan lower -- and at this point neither side appears to be backing down. On Wednesday, President Donald Trump said he was the “chosen one” to wage a trade war with China and asserted that he's winning. Commerce Ministry spokesman Gao Feng said China will be forced to retaliate if the U.S. follows through with new tariffs.
The yuan fell 0.18% to 7.0960 a dollar as of 9:33 a.m. in Shanghai. The currency weakened past 7 for the first time since the financial crisis on Aug. 5.
Still, factors including steady fixings have “prompted the market to believe that China does not favor a rapid depreciation of the yuan,” said Mitul Kotecha, senior emerging-markets strategist at TD Securities in Singapore, who said he expects the currency to end the year at 7.1. “The fear of intervention is a key factor,” Kotecha said.
To contact the reporters on this story: Tian Chen in Hong Kong at tchen259@bloomberg.net;Qizi Sun in Beijing at qsun62@bloomberg.net
To contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, Philip Glamann, Will Davies
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