FX round-up: Yuan in focus ahead of 6 July US tariff deadline

Sterling slipped further towards its October 2017 lows as Bank of England chief economist Andrew Haldane not to interpret his recent vote for an interest rate hike as a vote for faster rate rises.

Also weighing on Sterling were gains on Wall Street alongside a reversal in an earlier move down in US Treasury bond yields which was serving to boost the US dollar.

As of 1956 BST, cable was trading lower by 0.3% to 1.30731, alongside drop of 0.34% to 1.1311 versus the euro.

Versus the US dollar, Michael Hewson, chief market analyst at CMC Markets UK, pointed out that it was "testing" trend line support from the 2017 lows around the 1.3100/10 area.

"A break below 1.3100 opens up a potential move towards 1.2980, while a move back above 1.3220 argues for a move back to the 1.3320 area," he told clients.

In terms of the bigger picture however, the US dollar sport index was little changed, although it was in fact drifting lower by 0.03% to 95.2610.

Yet it's not always about G-10 FX and on Thursday all eyes were indeed elsewhere, on emerging markets, and on China in particular.

Overnight, the yuan advanced 0.28% to trade at 6.6270 in its cross against the Greenback - reaching its highest level since December. In parallel, the Indian rupee had plumbed a record low, alongside renewed weakness in Indonesia's rupiah.

In a nutshell, as analysts at Unicredit put it: "It is not clear whether the recent decline in the TWI is a mere correction of overly strong levels in light of weaker growth (signalled by the May hard data releases), or is rather a direct response to the escalation in US-China trade tensions."

UniCredit said Chinese retaliation via currency weakness was the least likely of the two scenarios.

The broker said: "But if the latter scenario of “deliberate” depreciation as a means of retaliation holds true (which we assume to be less likely), then this has the scope to become a negative driver of EMFX in itself (like that seen over 3Q15), as it would lead to competitive devaluations.

"As of now, after the recent move there is no serious sign that markets are entertaining such a possibility."

With the above in mind, UniCredit explained that it would be watching how the yuan behaved going into the 6 July deadline for Washington to decide whether or not to impose tariffs on China.

"If the depreciation extends, we would expect further negative ramifications to EMFX more broadly, starting first and foremost with CNY proxies (like KRW and TWD in Asia)."

Euro/dollar was up by 0.03% to 1.5571, Dollar/yen by 0.34% to 110.634 and Euro/pound by 0.35% to 0.88432.

The Aussie meanwhile was adding 0.1% to 0.7376.