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Asian Session – US dollar rebounds from heavy losses following today’s less aggressive yuan depreciation

The Chinese currency was again in focus during Thursday’s Asian session, as the yuan’s central parity against the US dollar was set 1.1% lower than yesterday’s rate. Although the People’s Bank of China sought to reassure that there were no fundamental reasons that would drive the yuan even lower, there were also some reports that some members inside the Chinese government are pushing for an even bigger devaluation. Specifically a 10% devaluation was likely according to some sources, although analysts said the decline was likely to be more modest. The yuan’s central rate has fallen by around 3% so far this week (from 6.20 to around 6.40), although the drop was likely moderated by intervention by the Bank of China.

The US dollar was hit hard by the developments in China, as some speculated that the Federal Reserve might not raise interest rates during its September meeting as expected because of uncertainty over Chinese economic developments. Although this conclusion is most likely to be premature right now, New York Fed President William Dudley did not play down the significance of the Chinese move, saying in a speech that China’s interventions could have “huge implications for the world economy”.

The dollar managed to claw back from under 124 yen to 124.51, as stocks on Wall Street also managed to close little changed after opening with sizeable losses during Wednesday’s trading. The aussie also rebounded from the previous day’s low of 0.7217 to trade around 0.7360 as there was optimism that there would be no fresh moves from China and that the situation would stabilize.

Concerning the euro, the draft bailout deal between Greece and its creditors was due to be debated in the country’s parliament today. However, there were objections by Germany regarding some aspects of the bailout proposal, which could result in delays in the overall approval process and therefore the arrangement of a new bridge loan to Greece so that it wouldn’t default on debt it is due to pay back to the ECB on August 20.

The euro had traded as high as 1.1213 the previous day, but it was off about 1 cent from that high to trade at 1.1120. There was speculation that the euro had been used as a funding currency and that drops in risk assets the previous day caused traders to cover their positions.

Looking ahead, the main item of focus will be US retail sales early in the US session. Retail sales during July are expected to be up 0.6% month-on-month; a significant gain that will more than offset the surprise 0.3% contraction of the previous month. Given the importance of retail sales as an indicator of consumption, the data will show how the third quarter started for the US economy. Weekly initial jobless claims will also come out and they are expected to hold around the previous week’s level of 270 thousand – a relatively low level.

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