China's yuan leads rally ahead of US trade deal

China's yuan led a rally in trade-sensitive currencies on Monday and the Australian dollar recovered some recent losses as the imminent signing of a preliminary US-China trade deal boosted sentiment.

The US-China Phase 1 agreement, due to be signed at the White House on Wednesday, marks the first step towards ending a damaging 18-month trade dispute between the world's two largest economies.

The turnaround in the yuan, which was at multi-year lows in September, reflects investors' growing confidence that the worst of the trade war has passed.

Adam Cole, an analyst at RBC Capital Markets, said that in the absence of any significant announcements over the weekend “markets have defaulted to small risk-on moves overnight”.

The offshore yuan - the currency most attuned to China-US trade developments - crossed the 6.9 per dollar mark to hit a new 5-1/2 month high of 6.8944, 0.3 per cent higher on the day against the US dollar.

Some investors and analysts say the yuan is enjoying an unusual turn as a haven.

The Aussie, which has been hurt by worries about the economic damage of the country's ongoing bushfires, rose 0.3 per cent to hit a one-week high of $0.6919. The New Zealand dollar also climbed 0.2 per cent to its strongest since Thursday at $.6650.

The Japanese yen weakened 0.1 per cent to 109.65 per dollar, close to a seven-month low, and it slid 0.6 per cent to an 8-month low against the trade-sensitive Korean won. A holiday in Japan reduced overall trading volumes.

Currency markets elsewhere were quiet, with sterling the only big mover. The pound shed 0.6 per cent in early trading after another Bank of England policymaker, Gertjan Vlieghe, said on Sunday that he would vote for an interest rate cut this month unless economic data improved significantly.

The British currency fell to as low as $1.2995 and against the euro to 85.62 pence. Data on GDP growth and industrial production in November for Britain is released at 0930 GMT, and will be closely watched.

Speculators have moved into a net long position in sterling, data shows, a stark contrast from the large short position they held a few months ago.

“Its (the pound's) vulnerability will be fully-exposed if this week's data are soft,” said Kit Juckes, an analyst at Societe Generale.

Euro/dollar continued to tread water at $1.1125.

Receding fears of conflict in West Asia despite ongoing tensions centred on Iran, have improved investors' mood, but this has meant little for the direction of the euro or dollar.

The dollar index, which measures the greenback against a basket of currencies, rose 0.1 per cent to 97.417.

The Taiwanese dollar rose to its strongest in more than 18 months after the re-election of President Tsai Ing-wen at the weekend removed some uncertainty.