China's yuan firms, stocks wobble after Phase 1 deal signing

SHANGHAI, Jan 16 (Reuters) - China’s yuan firmed on Thursday as investors cautiously welcomed the signing of a Phase 1 deal between China and the United States, but equities wavered as the agreement left a number of deeper issues unresolved.

The partial trade deal signed on Wednesday may have eased fears of further tit-for-tat escalations for now, but most of the tariffs imposed by the two sides over the last 18 months will remain in place and structural differences that led to the conflict were not addressed.

The yuan firmed 0.12% against the greenback to 6.8820 per dollar in early onshore trade, buoyed by relief that the deal had finally been signed and by a much stronger central bank guidance rate.

The People’s Bank of China set the midpoint fixing for its daily trading band at 6.8807 per dollar, its firmest level since July 26, 2019.

The currency has rallied 2.8% since early December, lifted by the trade deal and other signs of easing tensions between Washington and Beijing. It touched a six-month peak of 6.8661 per dollar on Tuesday.

In the offshore market, the yuan edged up about 0.1% from Wednesday’s close to trade hands at 6.8868 per dollar. It had touched its highest level since July 26 on Tuesday.

“On sentiment, the deal pushes the dollar down against the yuan. On China increasing imports (of U.S. goods), it pushes it up. Overall, I think the deal supports further yuan appreciation,” said a trader at Chinese bank in Shanghai.

Analysts at OCBC Wing Hing bank said the impact of the deal’s signing was limited.

“Markets will be watching the timeline for reducing tariffs and the development of Phase 2 negotiations,” they said. “We feel that although Sino-U.S. trade talks will remain a driving factor, economic fundamentals will have a larger impact on the yuan this in 2020.”

Chinese stocks, which also have rallied on optimism over a trade truce, showed little additional enthusiasm on the deal’s signing. While the agreement has helped bolster shaky business confidence, it is only expected to give a modest boost to the cooling economy.

The benchmark Shanghai Composite Index, which has gained 7.6% since the end of November, stalled after opening higher and was last trading down 0.06%. The blue-chip CSI300 index was off 0.11%.

In Hong Kong, the Hang Seng was 0.21% higher, shaking off earlier small losses.

“Given the amount of speculation by the markets and commentary by officials ahead of Wednesday’s signing, it is unsurprising markets have not rallied too strongly upon final signing,” said Hannah Anderson, global markets strategist at J.P. Morgan Asset Management.

“Fundamentally, this deal does little to alter either the U.S. or Chinese economies,” she added, noting that tariffs remain high and key issues in the U.S.-China relationship “remain unaddressed.”

Benchmark Chinese 10-year government bond futures were slightly lower as cautiously optimistic sentiment lowered appetite for safe-haven assets. The most-traded contract, for March delivery edged down 0.09% to 98.445.

Reporting by Andrew Galbraith and Winni Zhou; Editing by Kim Coghill