Published: Wed, July 25, 2018
Markets | By Erika Turner

China's bond yields jump, yuan falls on policy stimulus bets

China's bond yields jump, yuan falls on policy stimulus bets

China on Monday said it has no intention to spur exports through competitive devaluation of its currency, rejecting the United States' accusations of manipulating the exchange rate of the yuan. The major traded 0.1 percent up at 1.3137, having hit a low of 1.2957 on Thursday; it's lowest since September 2017. The Shanghai Composite index was 1.6 percent higher at the midday break and the blue-chip CSI300 index gained 1.7 percent.

The remarks, coupled with Trump's threats to impose tariffs on all US imports from China, triggered a bout of sell-offs in Wall Street and European stocks on Friday, despite good corporate earnings.

Expectations of further loosening in monetary conditions drove the offshore yuan down to a 13-month low, and underscored a broad change in China's policy direction as fears grow that an increasingly heated Sino-U.S. trade war could deal a harsh blow to the economy.

Trump launched his latest trade salvo on Friday, accusing China and the European Union of currency manipulation and saying he was ready to impose tariffs on all Chinese imports coming into the United States.

The dollar index fell 0.77 percent, with the euro up 0.74 percent to $1.1727.

Asian stocks followed that lead on Monday with Japan's Nikkei .n225 stumbling 0.9 percent.

"Although U.S. equities edged lower on Friday and the yen strengthened, most cross-asset moves are supportive of APAC equities - particularly dollar weakness, strength in emerging markets FX, and a dramatic bear steepening of global yield curves".

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"The market took the news as a possible sign the anchor at the long end may allow for some natural drift higher", ANZ said in a note to clients.

The US leader is already embroiled in a messy trade dispute with China and Europe, while negotiations with Canada and Mexico to revamp the North American Free Trade Agreement have stalled.

Fed non-voter Bullard spoke with a dovish tone when he stated that USA rates were high by global standards, that Fed forecasts indicate further gradual tightening but that curve inversion may be imminent and would be a bearish signal.

The shift in focus toward easing also comes after the central bank in July released 700 billion yuan in liquidity by cutting some banks' reserve requirements, prompted by concerns over tighter cash conditions and a potential economic drag from the US trade dispute. Brent eased 10 cents to $72.97. U.S. West Texas Intermediate was trading 1.2 percent higher at $68.85 a barrel, after falling as low as $67.08 on Tuesday, its lowest since June 22.

Spot gold was up 0.2 per cent at US$1,234.24 an ounce at 0045 GMT, after rising 0.7 per cent in the previous session.

That sent the 10-year benchmark Japanese government bond yield to a six-month peak on Monday.

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