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Yen stumbles on revived risk flows, yuan softens after rate cut

20 Feb 2020 / 10:58 H.

TOKYO: The Japanese yen traded near a nine-month low versus the dollar on Thursday as risk appetite improved on expectations that China will continue to take steps to reduce the economic impact of the coronavirus outbreak.

The yuan fell against the dollar in onshore trade after China cut the benchmark loan prime rate to prop up its economy. The rate cut was expected but some investors see more reductions in the near term as the authorities move to further lower financing costs to help companies.

The Australian dollar tumbled to the lowest level in more than a decade as a rise in the unemployment rate fanned expectations for interest rate cuts.

The yen was initially bought as a safe-haven asset when the outbreak of the virus in the central Chinese province of Hubei roiled financial markets last month.

However, yen buying is starting to fade as growth in the number of new cases of the virus in mainland China began to slow. Signs that Chinese officials are ready to take more drastic measures to support companies hit by the virus is another factor that has reduced demand for safe-haven investments.

"The yen's fall was so sudden that it could bounce back slightly in the very short term," said Yukio Ishizuki, foreign exchange strategist at Daiwa Securities in Tokyo.

"However, sentiment is leaning away from risk-off because China will pull out all the stops to support its economy."

The yen traded at 111.29 per dollar in Asia on Thursday, close to the lowest since May 2019.

Japan's currency tumbled 1.3% on Wednesday, its biggest daily decline since August, after triggering stop loss orders following the expiry of options that had kept the yen in a narrow range versus the dollar, according to Ishizuki.

In the onshore market, the yuan fell 0.9% to 7.0046 per dollar after the one-year loan prime rate (LPR) was cut 10 basis points, and the five-year LPR by five basis points on Thursday.

The LPR cuts followed a similar move in the central bank's medium-term lending rate on Monday as policymakers sought to ease the drag to businesses from the coronavirus outbreak.

China's manufacturing sector is gradually coming back on line after the outbreak of the virus led to temporary factory closures and severe travel restrictions, but many companies and households are likely to struggle due to income lost because of the illness.

China reported on Thursday a drop in new cases of the flu-like virus in Hubei province, the epicentre of the outbreak. Although it was accompanied by a change in diagnosis rules, the data helped risk appetite improve in the currency market.

The Swiss franc, another safe-haven, was quoted at 0.9832 versus the dollar, close to its weakest since December.

Many traders say they remain cautious because the previously unknown virus has resulted in more than 2,000 deaths in China and spread to 24 other countries.

The Australian dollar skidded to $0.6641, a low not seen since March 2009, after data showed the country's jobless rate jumped to 5.3% in January from 5.1% in December.

Sentiment for the Aussie had already taken a hit after minutes from a Reserve Bank of Australia meeting released earlier this week revealed that central bankers had considered easing policy. A weak labour market makes rate cuts more likely.

The euro traded at $1.0802, close to its lowest since April 2017. The common currency managed to stabilise in Asian trading, but sentiment remains weak after disappointing economic data sent it crashing through closely-watched support levels.

The pound was quoted at $1.2920 before data later on Thursday that is forecast to show growth in British retail sales.

Sterling fell 0.6% on Wednesday as market sentiment is caught between optimism about the economy and pessimism about Britain's talks with the European Union for a free trade deal. - Reuters

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