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FX round-up: Dollar gains in risk-off session, amid negative news out of China

By Alexander Bueso

Date: Thursday 03 Jan 2019

FX round-up: Dollar gains in risk-off session, amid negative news out of China

(Sharecast News) - Sterling weakened significantly on Wednesday in a 'risk-off' day for financial assets on the heels of a weak reading on a key economic report in China, even as Beijing fired a 'warning shot' across the bow of the government across the Taiwan Strait, in Taipei.

First thing on Wednesday morning, survey compilers Caixin and IHS Markit had reported a drop in their manufacturing sector Purchasing Managers' Index from a reading of 50.2 in November to 49.7 for December, marking the lowest reading since May 2017 and the first contraction in 19 months while missing expectations of 50.1.

Summing up the mood in markets after a very difficult 2018 for investors, analysts at Rabobank said: "So we are entering 2019 on a bad footing, with Asian equity indices firmly in the red (the Hang Seng at -2.8%) and 10y German bunds opening the year at 0.18%, within a whisker of their 2-year low."

In the background meanwhile, on the 40th anniversary of the first moves by China and Taiwan to de-escalate tensions, Chinese President, Xi Jinping, warned Taiwan that while it wishes a peaceful reunification between both countries, it would not renounce its right to use force if Taiwan moved towards formal independence, while touting the Hong Kong model as the best way forward.

But Taiwanese leader, Tsai Ing-wen, said his country would never accept Beijing's terms for reunification.

"I want to reiterate that Taiwan will never accept 'one country, two systems'. The vast majority of Taiwanese public opinion also resolutely opposes 'one country, two systems', and this is also the 'Taiwan consensus'," he said.

Although global stockmarkets managed to pare early losses in the wake of a weaker-than-expected reading on a key survey of manufacturing sector conditions in China, losses in dollar/yen appeared to betray investors' underlying caution.

As of 1915 GMT, dollar/yen was trading 0.35% lower to 109.36, although the Greenback was stronger against the world's other main currencies, with euro/dollar down 1.49% at 1.13312 and cable shedding 1.34% to 1.2590.

Contributing to weakness in the pound, IHS Markit's closely-followed UK factory sector PMI for December surprised sharply to the upside, printing at 54.2 following a reading of 53.8 in November (consensus: 52.5).

Nevertheless, the details of that report were weak, with Barclays's Fabrice Montagne and Sreekala Kochugovindan telling clients: "Headline manufacturing sentiment rebounded a bit further in December driven by aggressive stockpiling in the consumer and intermediate goods sectors in preparation for a possible no-deal Brexit.

"However, we expect unwinding of these temporary measures to inevitably drag on future activity. Input prices eased to their lowest in 2 ˝ years."

The US dollar also managed gains against the Swiss franc, although the recent trend continued to point lower, rising to 0.9901.

Versus commodity currencies suich as the Aussie, the US dollar was down by 0.93% to 0.69902.

From a bird's eye view, the spot US dollar index was 0.89% higher at 96.9390.

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