Chinese yuan, UK pound retreat after earlier rallies

PUBLISHED : Wednesday, 18 January, 2017, 11:56am
UPDATED : Wednesday, 18 January, 2017, 11:56am

The Chinese yuan and British pound retreated from their overnight rallies that were driven by comments from leaders of United Kingdom and United States.

Offshore yuan fell 210 basis points or 0.31 per cent to 6.8234 against the US dollar on Wednesday, after it rallied more than 500 basis points on Tuesday to stand at the 6.80 threshold.

Onshore yuan strengthened 0.12 per cent or 83 points to 6.8645 per dollar, after the People’s Bank of China set the reference point at 6.8525. Wednesday's yuan fixing is at the highest level in two months.

The pound retreated 0.58 per cent to US$1.2347 after soaring 3.07 per cent to US$1.2415 as uncertainty about the UK’s future relationship with the EU was diminished following a speech by British Prime Minister Theresa May.

Tuesday’s rally of yuan was mainly the result of an across-the-board drop of the US dollar against other currencies, after US president-elect Donald Trump said in an interview with the Wall Street Journal that the dollar was “too strong” to compete with its trading counterpart China.

Trump’s remarks also dragged down the US dollar index by 0.9 per cent to 100.28, the weakest level seen since early December.

Although dealers showed little appetite for short yuan positions overnight, it remains to be seen whether the yuan will hold up at the levels seen in early January.

“I think longer term bullish US dollar bias will re-emerge, but it is very much predicated on US fiscal spending and US tax reform,” said Stephen Innes, senior trader at Oanda.

Trump’s complaint was viewed as a departure from the US government’s policy stance in favour of a strong dollar that started in the mid-1990s, analysts at DBS Bank said in a note.

However, markets are sceptical that this would reverse the US dollar uptrend that started two months ago.

“Until Trump disappoints on his promises to put ‘America First’, it is premature to write the obituary for the USD,” DBS analysts said.

Trump is scheduled to submit his budget proposals by the first Monday in February. If he delivers tax cuts and lifts fiscal spending as promised, the Federal Reserve believes this will be positive for the US economy and would warrant more interest rate increases – which could push the US dollar up further.

In the European market, Theresa May took a softer than expected approach in a speech on Brexit late Tuesday night when she promised a parliamentary vote before making a clean break between the UK and the European Union. The speech outlined Britain’s major objectives on Brexit before the formal negotiations begin with the EU.

May’s announcement that both houses of Parliament will vote on the final Brexit deal is positive for the pound, as the process, at a minimum, should ensure that the most severe outcomes are avoided, Innes said.

However, despite knowing a little more about the UK government’s plans, the medium- to long-term outlook remains highly uncertain and will depend on just what is negotiated, said Paul Hollingsworth, economist at Capital Economics.