(Bloomberg) — The yuan has had a fine run but the tide may be turning, even if the People’s Bank of China refrains from taking further steps to cool its rally.

The currency could find it harder to climb from here as seasonal dividend payments from Hong Kong-listed Chinese firms are set to swell. The yuan is also likely to come under pressure as the dollar gets a boost from growing debate among Federal Reserve officials about the timing for a reduction in stimulus.

The debate on the yuan’s outlook has focused on the PBOC’s role after the authorities raised the foreign-exchange reserve requirement and unleashed a stream of rhetoric to check the currency’s gains. The growing obstacles to further strength will help the central bank, which is trying to rein in the currency while sticking to its goal of making it a more market-driven exchange rate.

“The renminbi’s strength has peaked,” said Chi Lo, Greater China senior economist at BNP Paribas Asset Management in Hong Kong. He sees the yuan trading in a range of 6.4 to 6.6 per dollar this year, implying a drop of as much as 3% from current levels.

The yuan climbed to a five-year high against a basket of trading-partner currencies last week, buoyed by inflows into stocks and bonds as well as an improving economic outlook. It has outperformed most of its Asian peers this quarter.

But, the gains may have peaked for now, with the currency falling 0.4% on Thursday. It was little changed at 6.4063 on Friday afternoon in Asia. Expectations of “one-way” yuan appreciation have abated following the recent correction, China Securities Journal said in a front-page report, citing unnamed analysts.

Meanwhile, Chinese firms listed in Hong Kong are expected to pay about $16.8 billion of dividends in June, nearly $10 billion more than the previous month, according to Bloomberg’s calculations using company filings. Additionally, a total of $50.6 billion of dividends are likely to be remitted in July and August, meaning the impact of companies swapping the yuan for Hong Kong dollars in the three month period from June will be the highest for the year.

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To be sure, the dividend season is unlikely to lead to a dramatic slide in the currency. That’s because not all the companies need to sell the yuan in the spot market for the Hong Kong dollar, which they may already own and can be used for dividend payments. Also, foreign funds will continue to pile into Chinese bonds, especially with the upcoming inclusion of the notes in FTSE’s flagship index, providing another source of support for the yuan.

Trade Spat

For now, trade tensions could pose another risk to the yuan. President Joe Biden signed an order Thursday amending a ban on U.S. investment in Chinese companies begun under his predecessor, naming 59 firms with ties to China’s military or in the surveillance industry.

The currency could also face pressure from the southbound leg of an existing bond trading link between China and Hong Kong, which is expected to come online soon.

“Over time, investors for Southbound Bond Connect will convert onshore yuan to Hong Kong dollar and other foreign currencies to invest,” said Ju Wang, a senior currency strategist at HSBC Holdings Plc. “Initially, the eligible banks could use their own FX deposits which are available for lending and portfolio investments.”

All this is happening just as Beijing raised the investment quota for domestic traders to purchase overseas securities yet again at end-May, setting the stage for outflows to increase.

The dollar’s impact will be crucial too, after the yuan climbed to a three-year high versus the greenback last week. Speculation is growing that the Fed may begin tapering its bond-buying program this year — a move that will strengthen the greenback — as the U.S. economic recovery gains traction.

(Updates yuan level in sixth paragraph)

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