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• AUD gains weight after yuan announcement.
• US equities fail to fire.
• Economic data, soft globally.

Announcements from China can be treated with trepidation by the markets, as they can significantly impact economies and financial markets. This was no more apparent than with the announcement over the weekend from the Chinese government that they would allow the yuan to appreciate from the level pegged in 2008. The AUD was the greatest beneficiary and treated the announcement of yuan ‘flexibility’ with enthusiasm, gaining a cent against the Greenback between US markets closing on Friday and Asian markets opening on Monday. The announcement saw Chinese stocks post stellar gains and commodity prices put on weight. There is currently a vacuum of local data and whether these levels are sustained will be greatly influenced by risk appetite via US equity markets.

After the Chinese endorsement that the global recovery is sustainable, the impact on US equity markets was not profound. This is largely because the minor appreciation being allowed by the People’s Bank of China is considered largely immaterial relative to its fair value which some analysts speculate may be as much as 20% higher than where it had been pegged. The ensuing growth for US, European trade is therefore considered weak while any appreciation in the price of imports will put pressure on inflation and interest rates.

Amongst the backdrop of a lacklustre five days of data globally and in particular sluggish home sales in the US, equity markets have been weak over the last two days and risk appetite is soft as a result. The greatest support provided to the local economy from developed countries came in the form of UK Retails Sales coming out better than expected at 0.6% for May. The other redeeming feature came from the announcement last week that the EU would release the results from the “stress tests” on European banks. This seeks to give the markets confidence that the resilience of the banking system is improved, in measures which are likely to become common place to ensure the viability of the Euro. Ahead of the G20 summit this weekend, we’ll be looking for quotes of solidarity when it comes to reforming economies in Europe, particularly from the Franco-German relationship which despite President Sarkozy’s attempts at warm embraces, can be colder than Perisher.