May 5, 2020 / 5:40 AM / a month ago

FOREX-Aussie keeps gains after steady RBA, but Sino-U.S. tensions temper mood

* AUD, NZD edge higher after recouping Monday’s losses

* Heightened Sino-U.S. tensions drag on yuan

* Graphic: World FX rates in 2020 tmsnrt.rs/2RBWI5E (Updates after RBA rate announcement)

By Tom Westbrook

SINGAPORE, May 5 (Reuters) - The dollar handed back a sliver of recent gains to commodity currencies on Tuesday as oil prices bounced back, but hung on against the yuan as traders weighed optimism about a coronavirus recovery in China against fears about rising Sino-U.S. tensions.

The Australian dollar inched further up over 64 cents at $0.6454 after the Reserve Bank of Australia left its targets for the cash rate and three-year government bond yields unchanged at 0.25%, but forecast the economy would suffer its largest ever contraction in the first half of the year.

While RBA Governor Philip Lowe said a delay or reimposition of restrictions to contain the pandemic could make economic outcomes more challenging, the Aussie’s rally this week has been helped by a drop in cases and lifting of some local restrictions.

The kiwi was a shade higher too, at $0.6070.

Public holidays in Japan and China lightened trade, while caution on the global growth outlook capped further moves.

The yuan rose to 7.1195 per dollar in offshore trade, recovering from a six-week low of 7.1560 hit in the previous session, but well below the range where it spent last month.

U.S. President Donald Trump has stepped up verbal attacks on China ahead of a Nov. 3 election where both he and Democratic contender Joe Biden are jostling to project a tough stance against the United States’ main strategic rival.

An internal Chinese report warned Beijing faces a rising wave of worldwide hostility in the wake of the outbreak that could tip relations with the United States into confrontation, people familiar with the paper told Reuters.

Trump has floated tariffs, or even reneging on U.S. debt obligations to China as retaliatory possibilities as he seeks to pin blame for the COVID-19 pandemic, tempering traders’ optimism about progress towards economic recovery elsewhere.

“The yuan is that bellwether that everybody’s going to be looking at,” said Stephen Innes, chief global market strategist at AxiCorp. Its softness muted gains in Asian currencies, such as Malaysia’s ringgit, he said, even as oil prices bounced.

The cautious trading backdrop also pushed the yen ahead slightly to 106.58 per dollar, within striking distance of multi-month lows.

U.S. crude rose 6.6% and Brent around 5% as production fell and countries around the globe including Italy, Finland and several U.S. states eased lockdown restrictions.

Elsewhere, the euro was pressured by a court challenge from German academics to the European Central Bank’s bond buying programme.

A ruling is due later on Tuesday and while outright rejection of the German Bundesbank’s participation in the asset purchases appears unlikely, anything less than a clear-cut defeat of the challenge could hit the single currency.

The euro last sat at $1.0906, close to a week-low hit overnight. The pound was rangebound at $1.2461. (Reporting by Tom Westbrook Additional reporting by Vidya Ranganathan Editing by Shri Navaratnam and Lincoln Feast.)

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