Trade deal optimism boosts Aussie dollar, yuan

London

TRADE-ORIENTED currencies including the Australian dollar surged on Tuesday, with the Chinese currency poised for its biggest daily jump in nearly three months on increasing signs that Beijing and Washington are inching closer to a trade deal.

A decision by the Chinese central bank to trim lending rates by only 5 basis points also boosted general risk appetite, with the perceived safe-haven Japanese yen and the Swiss franc weakening by a third of a percentage point.

China is pushing US President Donald Trump to remove more tariffs imposed in September as part of a "phase one" US-China trade deal, which is expected to be signed later this month, people familiar with the negotiations said.

"(The market thinks) we are clearly very close to achieving phase one of the trade deal and therefore the anticipation is that growth in China might improve, and therefore we might see improvement in the renminbi," said Jane Foley, a senior FX strategist at Rabobank.

The yuan traded in the offshore market jumped as much as 0.7 per cent to its strongest since Aug 5 at 6.9867. The onshore yuan also posted its strongest close since Aug 2.

The currency held its gains even after China's central bank cut its one-year medium-term lending facility (MLF) rate for the first time since early 2016, though it opted for a 5 bps cut that Commerzbank called "tiny".

China and the US have imposed tariffs on each other's goods in a trade war that has dragged on for 16 months and raised the spectre of a global recession. Resolving the row would boost riskier assets, ease concern about the economic outlook and reduce the need for aggressive monetary easing.

The US dollar was broadly flat against a basket of currencies but advanced 0.3 per cent against the safe-haven yen and Swiss franc.

Kit Juckes, head of FX strategy at Société Générale, said the agreement would probably mark a truce rather than peace but added that "the chance of getting a first-stage deal seems to be quite good".

The optimism spilled over into other currencies, with the Australian dollar close to recent three-month highs and the highest versus the yen since the end of July. It wasn't much moved after the central bank left monetary policy unchanged, as expected.

The euro was slightly down against the dollar. It rose 0.24 per cent versus the yen. REUTERS