Global markets celebrated on Monday at the merest hint that China would let its currency appreciate, showing just how badly the Middle Kingdom is needed to drive a recovery in the sagging world economy.
All eyes are now focused on the daily reference rate set by the Chinese central bank to manage the yuan's value. The fixing is due at 0115 GMT and dealers were eager to see how much it might rise from Friday's 6.8275 per U.S. dollar.
Assets leveraged to global growth, from commodities to stocks and Asian currencies, all rose on hopes that China's surprise pledge of yuan flexibility would lessen the risk of a trade war between the world's biggest and third-largest economies.
It's a relief rally in the sense that this could ease trade tensions into the Group of 20 meeting, said Sean Callow, senior currency strategist at Westpac in Sydney.
Perhaps the excitement has been overdone as this is just a small step on a very long march, he added. But you have to assume the yuan will rise this week given all the political angst. They need to turn up at the G20 with something real.
Beijing has faced a barrage of complaints from abroad for keeping the yuan artificially cheap even as the country's export juggernaut roared back to life.
Yet many economists suspect Beijing will nudge the exchange rate higher in increments, not leaps.
The People's Bank of China had surprised everyone on Saturday by saying it would make the yuan more flexible, but by Sunday it already seemed to be playing down the chance of major change.
In a new statement on its website, the central bank explicitly ruled out a one-off revaluation, repeating that there was no basis for any big appreciation and that the currency's value was not far off its fair level.
GOOD FOR GROWTH
Still, investors welcomed any sign that Beijing was ready to break a 23-month-old peg to the dollar.
As well as a nod to trade tensions, a rising yuan would also give China more purchasing power to buy foreign goods, which would be positive for world trade, especially for commodity exporters such as Australia, Brazil, Canada and New Zealand.
The Australian dollar jumped a full cent on Monday to $0.8800, while the U.S. dollar fell broadly and commodities from oil to base metals all rose. U.S. stock futures followed, with the S&P 500 up 1.2 percent and Japan's Nikkei 225 rising 1.7 percent.
Falls in the U.S. dollar are typically positive for commodity prices and Chinese purchasing power should improve, auguring well for the Aussie overall, while mining stocks historically have outperformed in rising yuan periods, said Scott Haslem, chief economist at UBS in Sydney.
Most Asian currencies climbed, with the Singapore dollar up 1 percent on its U.S. counterpart. The region's export-focused countries have been lothe to let their currencies appreciate and lose competitiveness while the yuan was fixed.
The improvement in risk appetite led to a broad decline in safe-haven government bonds, with Treasuries taking a double whammy on speculation that Beijing would have less U.S. dollars to invest in U.S. assets if it curbed intervention.
It's a small step toward the day when China will not automatically pile up reserves to be parked in Treasuries, said Westpac's Callow. Though that's a distant prospect as yet.
China has the world's largest war-chest of foreign exchange reserves, estimated at $2.45 trillion at the end of March. A large chunk of that is invested in Treasuries, helping keep U.S. yields lower than they might otherwise be.
Economists also hope a higher yuan could help temper inflation in China by pushing down import prices, which in turn could mean Beijing would have less need to tighten monetary policy aggressively. Markets have been worried China could over-tighten and suffer a hard landing.
That could make any move by Beijing more palatable to a domestic audience that sees any concessions on the yuan as kow-towing to the United States.
A few websites in China made their views heard.
This is such worrying news! China, you have surrendered! wrote one online reader of the Global Times, a popular tabloid.
We're so well-behaved, doing whatever the United States asks of us, wondered another, sarcastically.
(Additional reporting by Simon Rabinovitch, Pedro da Costa and Ben Blanchard; Editing by Mark Bendeich)