China waves the green flag for yuan bulls

London

THE yuan led commodity currencies higher against the dollar on Monday as investors lapped up risky assets on growing expectations of a strong Chinese economic rebound and the United States continued to report a surge in coronavirus infections.

An index of blue-chip Chinese shares soared to its highest in five years as traders bet on a revival in China, pushing the yuan to its highest levels since March 18 against the dollar. "The rally in mainland China equities has been the big catalyst," said Stephen Gallo, European head of FX strategy at BMO Financial Group.

"The only caveat is that China's economy is not driven purely by free-market forces. But if regulators in China are engineering a stronger equity market, it can still feed through to the rest of the world." A revival in Chinese economic activity bodes well for Australia and Europe who count Beijing as their biggest trading partner.

The euro rose 0.5 per cent to US$1.1303 to a two-week high also supported by strong data: German industrial goods rose by 10.4 per cent in May, rebounding from their biggest drop since records began in 1991 and the bloc's retail sales figures rose above pre-Covid-19 levels in some countries.

The Australian dollar rose 0.3 per cent to US$0.6970 following a 1.2 per cent gain last week, with the market focused on a Reserve Bank of Australia policy meeting on Tuesday.

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Against a basket of currencies, the dollar edged 0.3 per cent down to 96.87, its lowest level since July 2.

The broad recovery in risk appetite pushed the dollar lower. Already grappling with a steady rise of Covid-19 infections in the US, the dollar was further dented by a further culling of economic projections.

Goldman Sachs meanwhile revised its economic projections for the US economy down to a 4.6 per cent contraction in 2020 versus a previous estimate of -4.2 per cent.

"The healthy rebound in consumer services spending seen since mid-April now appears likely to stall in July and August as authorities impose further restrictions to contain the virus spread," Goldman analysts said in a note.

Speculators' net bearish bets on the US dollar grew to the largest position in nearly two years in the latest week, according to the US Commodity Futures Trading Commission data released on Friday.

"As long as the Fed is still buying assets and prepared to do more, we expect this negative correlation, Risk On, Dollar Off, to dominate financial markets over the coming quarters," said Chris Turner, global head of markets at ING.

Sterling moved slightly higher to US$1.2509 against the dollar amid reports that British Finance Minister Rishi Sunak plans to raise the property tax threshold and temporarily cut the value-added tax (VAT) in the hospitality sector. REUTERS