Yuan will be de-pegged from USD
22/06/10 11:14
Workshops
Chris Lori & Steve Winiarski, CTA's
Sydney, AUS
July 23-25
Chris Lori, CTA
Singapore
Aug 27-29
The People's Bank of China announcement that the yuan will be de-pegged from the US dollar has supported risk assets at the start of the week. In our weekly Sunday evening (North America) Live Pro Traders Club, I had stated that there was effectively no change in what the market already expected out of China, so the "euphoria" would be short lived once the market came to terms with the fact that there would be uncertainty over the timing of the Yuan movement. I had also suggested that although DJIA futures were 100+ higher during Asia and Europe sessions, US equities would likely open higher followed by a sell-off, which is exactly what happened. It's important to note investor sentiment has been bolstered by the reduction of tensions between America and China over currency policy, and by the accompanying bullish statement from China's authorities that the 'upturn of the Chinese economy has become more solid with the enhanced economic stability'.
As a result, the currencies of those economies with the largest share of exports to China - Australia, Japan, Taiwan, Korea, Brazil and Indonesia -had initially benefited. I suspect that we may have even achieved a near term top in risk currencies and to look for some downside from here. Moreover, as the People's Bank of China now will have to buy fewer dollars, somewhat slower reserve accumulation will lead to slower accumulation of US Treasuries.
Chris Lori & Steve Winiarski, CTA's
Sydney, AUS
July 23-25
Chris Lori, CTA
Singapore
Aug 27-29
The People's Bank of China announcement that the yuan will be de-pegged from the US dollar has supported risk assets at the start of the week. In our weekly Sunday evening (North America) Live Pro Traders Club, I had stated that there was effectively no change in what the market already expected out of China, so the "euphoria" would be short lived once the market came to terms with the fact that there would be uncertainty over the timing of the Yuan movement. I had also suggested that although DJIA futures were 100+ higher during Asia and Europe sessions, US equities would likely open higher followed by a sell-off, which is exactly what happened. It's important to note investor sentiment has been bolstered by the reduction of tensions between America and China over currency policy, and by the accompanying bullish statement from China's authorities that the 'upturn of the Chinese economy has become more solid with the enhanced economic stability'.
As a result, the currencies of those economies with the largest share of exports to China - Australia, Japan, Taiwan, Korea, Brazil and Indonesia -had initially benefited. I suspect that we may have even achieved a near term top in risk currencies and to look for some downside from here. Moreover, as the People's Bank of China now will have to buy fewer dollars, somewhat slower reserve accumulation will lead to slower accumulation of US Treasuries.
Are there any lessons from the July 21, 2005 policy change? Then, the initial reaction in currency markets proved short-lived after China revalued the renminbi by 2.1% against the dollar and moved to a crawling peg. But as the Federal Reserve was raising interest rates at the time, the dollar quickly resumed its strengthening trend. In 2010 currency market participants should be similarly aware of over-reacting. The news does not signal that China will allow a major revaluation of the renminbi. The maximum permitted daily range will remain +/-0.5% and China's statement specifically mentions that no basis exists for a large-scale appreciation of the currency. So while China will allow its currency to resume strengthening again, the macroeconomic impact on global trade and capital flows as well as on inflation rates will be limited. Thus the long term reaction of exchange rates should be marginal too. So chill out market and come to your senses. I anticipate weakness in risk currencies following yesterdays highs.
The year end target for USDCNY remains 6.55. In the major currency markets the core concern about euro underperformance remains unchanged. Thus, we maintain our bearish EURUSD forecast of 1.15 by end-2010. What China's news does do is reinforce our view that commodity currencies will continue to do well in 2010 as the global economy recovers, but not without some material risk averse events that could take push them much lower.