Morning Bid: Volatile yuan, fragile yen cool sentiment

By Thomson Reuters Mar 25, 2024 | 4:49 PM

By Jamie McGeever

(Reuters) – A look at the day ahead in Asian markets.

Chinese markets will be under close scrutiny on Tuesday, as signs emerge that the recovery for much of this year in asset prices and investor sentiment may be fading as the first quarter draws to a close.

The broader tone across Asia is fairly muted too with regional stocks on the defensive as investors grapple with a resilient dollar and higher U.S. bond yields in the wake of last week’s central bank fireworks.

Tuesday’s calendar is relatively light. The latest reading of Japan’s service sector producer price inflation is potentially the most significant release, while Australian consumer sentiment is also on tap.

Exchange rates are in the spotlight, with the yen steadying after Japan’s top currency diplomat said its recent “big slide” against the dollar did not reflect fundamentals.

China’s yuan, meanwhile, goes in to Tuesday on the back of a roller-coaster couple of days. It sank on Friday and rebounded on Monday thanks to suspected dollar selling by state-owned banks as the central bank set its daily ‘fixing’ rate much stronger than analysts had expected.

The People’s Bank of China set the yuan fixing rate at 7.0996 per dollar, some 1,300 basis points lower than the market’s neutral estimate of 7.23. Analysts at Deutsche Bank said this marked the largest strengthening bias since November.

According to analysts at Rabobank, this suggests Beijing does not want the yuan to weaken excessively ahead of the U.S. presidential election in November.

Whatever the reasoning, it was a dramatic reversal from Friday, when the offshore yuan slumped 0.75% against the dollar for its biggest fall in over a year.

That was on huge volume too – spot volume on trading platform EBS was $24.2 billion, the fourth highest ever, according to CME Group, which owns EBS.

There doesn’t appear to be any clear explanation for the yuan’s swings, so it’s no surprise that the volatility and uncertainty is spilling over into other assets – blue chip stocks fell for a third day on Monday, the longest losing streak since January.

Sentiment toward China will not have been helped by news that U.S. and British officials filed charges, imposed sanctions, and called out Beijing over an alleged sweeping cyberespionage campaign that hit millions of people – including lawmakers, academics, journalists and more.

Washington and London accused the hacking group nicknamed “APT31” of being an arm of China’s Ministry of State Security and reeled off a laundry list of targets: White House staffers, U.S. senators, British parliamentarians, and government officials around the world who criticized Beijing.

Trade tensions are percolating again too, after the FT reported that China is seeking to block the use of Intel and AMD in government computers, and sideline Microsoft Windows and other foreign-made software in favor of domestic options.

Here are key developments that could provide more direction to markets on Tuesday:

– Japan services PPI (February)

– Australia consumer sentiment (March)

– Hong Kong trade (February)

(By Jamie McGeever)