Thursday 15:20 GMT
A surge in the Chinese renminbi is contributing to selling of the US dollar, its retreat from 14-year highs rattling the broader market and boosting the price of gold.
US and European equities are becalmed following a mixed Asian session, while Treasury yields dip from recent peaks despite what many analysts consider were a relatively hawkish set of minutes from the Federal Reserve.
Some industrial commodity prices are firmer, with big gains for China-based futures on demand hopes, and oil prices are gaining ground.
The Chinese renminbi is confounding expectations of further weakness this year and rallying hard. The offshore version of the currency (USD/CNH) on Wednesday staged its biggest one-day gain against the dollar in a year, adding 1.3 per cent.
And on Thursday the unit is up another 0.9 per cent to 6.8040 per buck, an eight-week high, helped by news that China’s service sector activity hit a 17-month peak.
The move — at one point the currency’s biggest two-day gain on record — is catching renminbi bears off guard. Some market watchers are speculating it may reflect a desire by Beijing to draw the sting from president-elect Donald Trump’s criticism that China has weakened its currency to support the nation’s exporters.
But most analysts see the action as an inevitable wobble in a market that had become overly sanguine about a steady renminbi decline, with the People’s Bank of China happy to see such positioning challenged.
“These wild movements indicate that the market will remain volatile in the short term, but won’t change the fact that the renminbi is under pressure to weaken,” said Zhou Hao, strategist at Commerzbank.
Adam Cole, head of G10 FX strategy at RBC Capital Markets, said: “Spillover from an overnight collapse in USD/CNH and further squeeze higher in offshore rates are the more important driver” of Thursday’s move.
“Whilst this is likely to be a temporary phenomenon, and we see trend CNY [on shore renminbi] depreciation as an ongoing theme, it does highlight the vulnerability of very long USD/G10 positions to external shocks, however positive the US domestic story,” he added.
To that end, investors were keeping a close eye on the US ADP private sector jobs survey, released before the Wall Street open on Thursday, for clues as to what to expect from Friday’s non-farm payrolls report.
The ADP showed 153,000 positions added in December, shy of analysts’ forecasts for 175,000. This has helped nudge down bond yields even though a separate report on weekly jobless claims hit a near 43-year low.
Economists are forecasting a headline NFP figure of a net 178,000 jobs added last month.
The latest data on the US service sector was broadly positive. The Institute for Supply Management’s nion-manufacturing index came in at 57.2 in December, unchanged from November but ahead of expectations and the highest level since October 2015.
The prospect of a tight US labour market getting even tighter should the incoming Trump administration deliver its planned economic boost has been supporting the dollar of late.
In minutes of its December meeting released on Thursday, the Fed alluded to the chances that interest rates may have to rise faster than expected to match a better growth scenario.
“Fiscal stimulus when they think we are so near full employment brings us to a new ball game [for the Fed],” said Steven Englander, FX strategist at Citi.
However, after hitting a 14-year intraday peak of 103.82 on Tuesday, the dollar index (DXY) has come under pressure. In the current session the DXY is down 0.8 per cent to 101.90 as the euro adds 0.6 per cent to $1.0549 and the Japanese yen jumps 1.2 per cent to ¥115.86 per buck.
The Mexican peso is providing another piece of notable action. After dropping to a record low against the greenback of 21.60 on concerns a Trump presidency will take protectionist measures against its southern neighbour, the peso is strengthening 0.5 per cent to 21.309 after the central bank intervened to stop the rot.
The firmer yen tends to be bad news for the exporter-sensitive Japanese stock market, and so the Topix index retreated from intraday one year highs to finish up just 0.08 per cent.
Investors in US and European equities are eyeing the forex moves warily. The S&P 500, which finished the previous session just a fraction short of its record close, is barely changed at 2,271 in mid-morning trade in New York.
The pan-European Stoxx 600 is up 0.1 per cent and London’s FTSE 100 is up 0.2 per cent to 7,204 having earlier hit a new record of 7,212 as miners provided initial support.
The standout gainer in Asia was Hong Kong’s Hang Seng, up 1.5 per cent for a three-week high powered by gains for Chinese energy stocks. On the mainland the Shanghai Composite managed to shrug off the currency shenanigans but was less ebullient, adding just 0.2 per cent.
The supposedly more hawkish Fed tone is being counteracted by some “haven” buying amid broad market caution and the soft ADP data, pushing yields lower.
The 10-year Treasury yield, which moves inversely to the bond price, is down 4 basis points to 2.42 per cent, while the more policy-sensitive two-year note is also off 4bp to 1.20 per cent. The two-year hit 1.30 per cent, a seven-year high, in mid-December.
The German 10-year Bund yield is flat at 0.27 per cent.
Gold is the big beneficiary of a sliding dollar, the bullion advancing $15 to 1,178 an ounce, a four-week high.
Oil prices are also stronger, with Brent crude up 1.5 per cent to $57.29 a barrel and West Texas Intermediate 1.4 per cent higher at $53.99.
News that Beijing plans a $115bn railway infrastructure project is helping boost sentiment towards construction-linked commodities.
Chinese-traded rebar and iron ore futures rose sharply, underpinning London-traded metals such as copper.
Additional reporting by Jennifer Hughes in Hong Kong
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