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Bond traders on yuan-watch as trade war turns data into old news

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The ever-escalating US-China trade dispute has made top-tier US economic prints all but obsolete as bond traders scramble to keep up with plummeting Treasury yields.

[NEW YORK] The ever-escalating US-China trade dispute has made top-tier US economic prints all but obsolete as bond traders scramble to keep up with plummeting Treasury yields.

The week ahead brings US inflation and retail sales - data that would normally have market-moving potential as investors try to predict where the US Federal Reserve is going to guide rates.

However, after a plummeting yuan and fraying relations between the US and China drove 10-year yields to the lowest level since 2016, the reports will likely take a backseat to any trade developments.

John Briggs of NatWest Markets plans to monitor where the People's Bank of China sets its daily reference rate for the yuan. He won't ignore the US economic data, but that's not really where the action is these days.

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And, besides, the upcoming reports are staler than usual, Mr Briggs said, given that they largely cover the period before US President Donald Trump unveiled plans on Aug 1 to slap a 10 per cent tariff on US$300 billion in additional Chinese imports.

"All of that's going to be secondary if Trump says something and China decides to let the yuan slip another 5 per cent," said Mr Briggs, head of strategy for the Americas at NatWest.

"So we're going to be watching yuan-fixings and what's going on with China."

The 10-year Treasury yield ended Friday at 1.75 per cent, down 10 basis points for the week, and sank to a nearly three-year low of 1.59 per cent on Wednesday.

It all happened so rapidly that it sent Bank of America's MOVE Index, a measure of bond-market volatility, to its highest level since June.

After the yuan's dive to a decade-low against the dollar spurred a global haven bid to start the week, China's central bank helped soothe the panic. The People's Bank of China (PBOC) delivered subsequent currency fixings that were in-line or stronger than analysts' estimates, easing anxiety over a potential currency war.

"The fix is the No 1 game in town and will continue to dictate the pace of play for risk assets over the near-term," Stephen Innes, managing director for VM Markets in Singapore, wrote in an Aug 7 note. "Nothing else matters at this stage."

Trade tensions showed few signs of abating Friday. Mr Trump said it'd be "fine" if US-China negotiations planned for next month were called off, adding that he's "not ready to make a deal".

Futures show traders now expect about 61 basis points of additional Fed easing this year. It's unlikely economic data will change that in the days ahead, according to Bank of America.

"Even if we see a trade deal signed into law, corporations and investors may still have a hard time shrugging off the risk aversion mindset," wrote strategists Carol Zhang and Olivia Lima in a note Friday.

"We are back to wait and see mode as economic data for the rest of the month may already be obsolete due to the timing of recent events."

BLOOMBERG