Asian stocks reversed their previous day's rise as investors took profits from a rally spurred by China's weekend decision to give its currency more flexibility.
China's move on the yuan had spurred demand for risky assets on optimism that a stronger yuan would lift China's purchasing power for foreign goods such as commodities, a boon to the global economy given the nation's vast appetite for raw materials.
Beijing set the mid-point for the yuan currency's daily trading range at a 5-year high, which gave the markets a brief respite from the selling but kept most benchmark indexes in the red.
The MSCI index of Asia Pacific ex-Japan stocks was down 0.7 per cent, hovering around the day's lows. Losses in technology and resources was the dominant drag on the broad market.
China's central bank set the yuan's daily mid-point at 6.7980 against the dollar, the highest level since the yuan's revaluation in July 2005, signalling it could allow the yuan to rise further.
Spot yuan opened at 6.7968 against the dollar, but then rose to as high as 6.7900 in early trade, up 0.11 per cent from the close on Monday, when it jumped 0.42 per cent.
The move reignited demand for riskier currency trades, with the Australian dollar and the euro jumping to the day's high against the dollar.
The euro climbed as high as $US1.2355, up from around $US1.2320 just before the yuan's daily mid-point was announced. The euro then slipped to trade flat on the day.
The Australian dollar rose as high as 88.34 US cents, up from around 87.65 US cents just before the mid-point was announced. The Australian dollar then dipped to 88.13 US cents, up 0.6 per cent on the day.
Foreign buying halts
Japan's Nikkei share average was down only 0.6 per cent after the yuan fixing, recovering from an earlier fall of 1.1 per cent.
"Investors are growing more cautious on the view that the magnitude of the yuan's new flexibility may not be as big as the market had earlier hoped," said Lee Sun-yeb, a market analyst at Shinhan Investment Corporation in Seoul.
"It seems the market is taking a bit of breather following its recent sharp gains, as it nears the earlier high. Foreign buying has also halted."
The Korea Composite Stock Price Index (KOSPI) fell 0.6 per cent as foreigners dumped shares amid growing risk aversion. Foreign investors were sellers of a net 13.6 billion won worth of shares, poised to snap their seven-session buying streak.
Oil prices perked up after the yuan mid-point setting, with US crude erasing losses to move into positive territory.
China's stock market, one of the world's worst performers this year, was lower after the previous day's surge. The Shanghai Composite Index was off 0.2 per cent, after rising 2.9 per cent on Monday to its highest close in 3 weeks.
And analysts expect more volatility ahead as the central bank's move comes a day after it kept the mid-point unchanged.
"The authorities want to say they are showing a more hands off approach and more flexibility in the markets but the reality is they are introducing more intraday volatility in the market," said Craig Chan, senior fx strategist at Nomura International.
Reuters