Chinese Move On Yuan Unlikely Just Now. By Nicholas Hastings

Speculation over a yuan revaluation should subside for now.

Neither politics nor economics suggest the time is right--no matter how much the U.S. or the euro zone would like it.

In fact, with the global economic recovery showing distinct signs of faltering, a stronger yuan would be more welcome than ever.

But, with relations between Washington and Beijing turning frosty again and with China itself questioning just how much its economy can afford a stronger yuan, chances are that the People's Bank of China won't start easing the currency's peg against the dollar until much later this year.

In looking at the timing of a Chinese move, the political climate will prove just as important as the economic one.

And, as Simon Derrick, a senior currency strategist at Bank of New York in London, pointed out: "China's political standoff with the U.S. presents the greatest obstacle to a shift in China's currency policy."

And this standoff got worse last week as the U.S. imposed new tariffs on steel pipe imports from China and China exulted in reducing its holdings of U.S. debt. All this came after U.S. President Barack Obama agreed to meet the Dalai Lama and provided new arms to Taiwan.

"It would certainly be politically inexpedient for China to 're-peg' the yuan given the risks of unpalatable accusations of compliance," Derrick said.

The economic climate may also be proving less accommodating than initially thought.

Although strong growth and an upturn in lending suggest that China needs to tighten monetary policy to prevent overheating, Beijing may not be so keen to employ a stronger yuan as part of its policy.

First of all, confidence in the recovery itself may not be so strong. On Friday, reports in China suggested that the government is conducting 'stress tests' to see how much a yuan appreciation would hurt the labor-intensive export sectors of the economy.

According to the reports, initial results suggest that a stronger yuan could be a serious blow to profitability in sectors such as these, where profit margins are already as thin as 3% to 5%.

So anyone expecting an early release or shift of the yuan peg could be sorely disappointed.

Bank of New York's Derrick suggests that in this case it may well be worth taking China at its word and assuming that last week's editorial in the China Securities Journal means what it says:

"Given the current situation, the conditions are not right for (a) big CNY appreciation in the first half (of 2010) at least."

Early Monday in Europe, the performance of major currencies was once again at the mercy of speculation over a bailout plan for Greece. Although weekend press reports suggested Germany and France are spearheading a EUR30 billion rescue plan, German Chancellor Angela Merkel has denied that any such deal has been agreed.

The euro, which initially bounced, fell back again to trade nearly flat at $1.3618, compared with $1.3616 late Friday in New York, according to EBS.

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The euro was still up at Y121.49 from Y121.00, while the dollar had risen to Y89.21 from Y88.86.