A look at the day ahead in European and global markets from Tom

Westbrook

As markets await key U.S. inflation figures this Good

Friday, the focus is swinging to a sudden resurgence in yuan

volatility.

After months of flatlining, traders are beginning to suspect

some kind of shift at the People's Bank of China as the yuan

logs some of its sharpest dollar swings this year.

Over a rocky few days, the currency has breached 7.2 per

dollar, rebounded, and by Tuesday was again slipping toward the

7.2 level despite a signal of support from the central bank via

a firm setting of the daily trading band.

Analysts at National Australia Bank think it is more than

coincidence that the dollar/yuan pair broke 7.2 in the same week

Japan abandoned its negative interest rate policy only to see

the yen fall.

Against the yen, the yuan has made a three-decade

high, which NAB analysts think may have motivated China's FX

authorities to loosen their grip on the currency.

"China sensitivity to the CNY/JPY exchange rate makes sense

in the context of Beijing not wishing to gift Japan a

competitive advantage in the many areas where China and Japan

compete in global markets," said NAB analysts Ray Attrill and

Rodrigo Catril.

Unless, or until, dollar/yen stabilises, they may continue

to let the yuan weaken leaving the Australian dollar under

pressure too since it can often trade in sympathy with the yuan.

Aussie dollar short positions jumped last week and the

currency has struggled to escape a narrow range this year. The

New Zealand dollar, also sensitive to the yuan, has fallen

through support to four-month lows and looks to be under

pressure.

Gold, after touching a record high last week, was steady.

The European calendar is fairly bare on Tuesday, while

second-tier data is due in the U.S. with consumer confidence,

manufacturing, services and durable goods figures expected.

Good Friday is a holiday in most markets but is also when

the U.S. publishes the Fed's favoured measure of inflation.

Asian stocks slipped slightly with the yuan on Tuesday,

while policymakers' warnings of possible intervention kept the

yen from falling and it held at 151.38 per dollar.

Key developments that could influence markets on Tuesday:

- German consumer confidence

- U.S. durable goods orders

- U.S. January home prices

- U.S. consumer confidence

- Richmond Fed manufacturing activity; Dallas Fed services

activity; Philadelphia Fed non-manufacturing activity