The Chinese Yuan has appreciated to 7.21 against the US Dollar; however, this situation has not always prevailed, as in April, the Yuan reached an all-time low of 7.42 against the US Dollar. The primary reason for this depreciation has been the trade conflict between two of the world’s largest economies. This conflict commenced when US President Donald Trump imposed reciprocal tariffs on its trading partners. Initially, a base tariff of 10% was applied to all countries, which was subsequently escalated based on the tariff and non-tariff barriers imposed by these trading partners.

The United States imposed tariffs of 34% on China, which, when combined with the previously imposed 20% tariffs, resulted in a cumulative tariff rate of 54%, marking the steepest tariffs imposed by the United States on any nation. In response, China retaliated promptly by imposing a 34% tariff on US goods to mirror the tariffs enforced by the United States. To worsen the situation, the United States implemented a 90-day pause of reciprocal tariffs for all countries, except for China. This trade conflict resulted in the United States increasing tariffs on China to 145%, while China imposed tariffs of 125% on US goods, increasing volatility in global markets and elevating safe-haven demand. The investors started selling dollars and exiting the US markets resulting in a weakening of the dollar which can be seen by the Dollar Index (DXY) falling from 103 to 98 within a few days.

Currently, both nations are engaged in efforts to de-escalate the tensions. Recently, US Treasury Secretary Scott Bessent stated that the 145% tariff on China is not sustainable, indicating that the United States is prepared to negotiate a reduction in tariffs through bilateral communication. In response, China’s Commerce Ministry conveyed that it is actively assessing the proposals from the United States. President Trump has also chipped in with his comments that at some point of time, the tariffs on China will be lowered to diffuse trade tensions. Even if a give-and-take is adopted, US would look forward to even out the trade imbalance, which might weigh on exports from China to the US. This could put a modest pressure on the Chinese Currency.

For the near future, we see the USDCNY trading between 7.00-7.40 range with 7.30 being the pivot point. Break above 7.30 would help test 7.40 resistance. On the downside, below 7.30, the pair would consolidate between 7.00 and 7.30 range. A clear sign of de-escalation of the trade war situation would see the pair head lower.