June 20 (Reuters) – The Australian dollar, Asian currencies, equities and metals should get a strong boost on Monday after China’s move to start allowing more yuan appreciation is taken as a vote of confidence in the global economic recovery’s staying power.

But gains in risky assets may be kept in check as investors come around to see China’s statement over the weekend resuming greater yuan flexibility may not lead to sharp gains in the near term, with the euro zone crisis worries still overshadowing markets.

Here are some scenarios on the potential yuan CNY=CFXS impact across FX markets and trading strategies. For full coverage, click on [ID:nSGE65J00E]

1) RISKY ASSETS TO RALLY, MAY BE LIMITED

* The Australian dollar, South Korean won KRW=, Asian currencies AFX=, equity markets and commodities are also seen jumping on Monday, in part because China’s move defuses the risk of a trade spat.

* Beijing is likely to allow only token yuan appreciation at first — more a cosmetic move to placate critics — rather than a sharp move higher that may invite heavy speculation in dollar/yuan offshore forwards CNYNDFOR=.

* China will also be cautious because the euro’s tumble has already meant trade-weighted yuan appreciation and it is still keeping a close eye on export figures. Yuan forecasts are unlikely to be changed much, with one-year targets bunching around 6.55 to 6.50 — implying about 5 percent appreciation.

* The Australian dollar AUD=D4 is one of the clearest beneficiaries from a yuan move thanks to its very strong correlation to both the Chinese economy and Asian currencies.

* The Aussie would also benefit from a rise in risk assets such as equities and commodities. But short-term gains may peter out with risk assets if small initial moves in the yuan stir disappointment among market players.

* Keep an eye out for the yuan to also slip depending on the dollar’s broader moves — something an adviser to the People’s Bank of China warned after Saturday’s statement. That could rattle short-term funds betting on sharp yuan gains.

STRATEGY

AUD/USD: Any Aussie jump is likely to take out $0.8730 resistance — the 50 percent retracement of the year’s 0.9389/0.8066 range, at 0.8730. A break above this level targets the 55-day moving average at 0.8838, with the 61.8 percent retracement next around 0.8885.

If market players are overall bullish on the Aussie but looking for a hedge against a potential return of risk aversion in the short run, one strategy would be to buy a one-year AUD/USD call option at a strike of 0.94 — near this year’s peak — with a knock-in option placed down at 0.83.

The knock-in option helps trim the overall cost of the position. This play benefits if the Aussie bounces higher in the near-term, then pulls back to trigger that knock-in option and from there starts to climb again.

USD/CNY NDFs: Expect a steepening of the NDF curve. Market players are likely to drive down short-term tenors sharply next week and perhaps overshoot in pricing in near-term yuan appreciation. If this happens, concentrate on the one-year tenor structural USD short position even while buying the one- and three-month tenors against it as curve plays on an overshoot.

For a graphic on the NDF curve: r.reuters.com/xyg92m

2) EURO AND YEN GAINS NOT CLEAR-CUT

* Euro/dollar EUR= might jump in knee-jerk reaction to the yuan news along, with any risky asset rally and spark further short-covering — but euro gains are not a claer-cut outcome.

* The prospect of less dollar diversification by China and other Asian central banks may also deter sharp euro gains.

* But one factor to keep in mind is that China may want to engineer a yuan drop versus the euro to limit the overall appreciation as the dollar rises, potentially resulting in euro purchases.

* The yen JPY= was the best-performing major currency in the 2005 shift on the view that a stronger yuan would make it more difficult for Japan to fight currency strength via intervention, and that the yen was a proxy for Asian currencies.

* This time, the yen could go in either direction — depending on whether players focus on the yen’s links to Asian currencies or the Japanese currency’s role in carry trades.

* The expected rise in U.S. Treasury yields may also be a factor. USD/JPY has traditionally had a close correlation with U.S. Treasury yields over the past couple of years, so higher U.S. yields might underpin the USD/JPY.

* Treasuries may suffer a double-whammy: an unwind of safe-haven purchases and expectations that China will reduce purchases stemming from recycling dollars due to its constant intervention.

STRATEGY

EUR/USD: The first resistance in EUR/USD is Friday’s intraday peak at 1.2415, and a push above that level targets 1.2455, the May 28 high. The $1.2570 level is being closely watched, the 38.2 percent retracement of the April-June slide. The break of these levels would likely trigger stop-losses that could send euro/dollar up to near $1.26/28 from Friday’s close at $1.2388. The 50 percent retracement of the April-June slide is anear $1.2785.

3) ASIAN CURRENCIES RECOVERY, MAY NOT REACH HIGHS

* Asian currencies will jump, pushing dollar/Asia NDFs sharply lower at the short-end of the curve. The KRW could outperform its peers after the wipeout of short dollar/won positions, and because its current daily correlation with USD/CNY NDFs is among the strongest.

* Investors who have bailed out of long Asian plays — both in FX and stocks — during the broad market selloff last month may see this as a window of opportunity to jump back in given the region’s solid growth and healthy fiscal profile.

* The Malaysian ringgit MYR= has also stalled recently and could see interest return. The Indian rupee INR=D4, Philippine peso PHP= and rupiah IDR= would get a lift, helped as well by solid local fundamentals.

* But Asia ex-Japan currencies are unlikely to revisit this year’s highs. Uncertainty over the global economic outlook has only grown, and China’s move has not changed the bigger picture. Watch for central bank intervention to stem any sharp gains.

STRATEGY

USD/KRW NDFs: One-month dollar/won NDFs KRWNDFOR= have held 1,190-1,195 to dollar, aided by massive Bank of Korea intervention. As the BOK may now step aside, expect the dollar/ won to aim for stop-losses below 1,190 and target 1,169 over the course of the week — the May 7 intraday high as well as the 61.8 percent retracement of the May-June spike.

– Krishna Kumar is a Reuters FX analyst

– John Noonan is Head of Asian FX at IFR Markets

(Editing by Eric Burroughs)