Snapping China's Peg May Hurt Euro And Yen. By Nicholas Hastings
Beijing will soon have music for bears' ears.
Yen and euro bears, that is.
After months of speculation, the People's Bank of China appears to be on the verge of releasing its yuan peg against the dollar. This will probably allow the Chinese currency to fluctuate in a wider daily band much as it did between 2005 and 2008.
China abandoned the float and fixed the peg when the credit crunch erupted and the global economy headed for recession.
See how the yuan has moved against the dollar in recent years:
Click Image to Enlarge
Now, as more evidence of a global recovery emerges, reducing the threat of a double dip recession, China appears ready to take more drastic action to slow the pace of its own recovery.
Up until now, the PBOC has relied on a gradual tightening in interest rates as well as a slow hiking in bank reserve requirements to prevent the economy from overheating.
But, with Chinese inflation now on the rise, the country looks set to engage other forms of monetary tightening, including an appreciation of the yuan.
Politics is also playing a key role.
After months of threats against Beijing on the issue, Washington appears to have adopted a more conciliatory tone. Last weekend, the previously combative Obama administration indefinitely postponed plans to name China a "currency manipulator" and U.S. Treasury Secretary Timothy Geithner packed his bags for unscheduled talks in the Chinese capital this week.
Market speculators are looking for China to finally move on the yuan as early as July. However, some reckon Beijing could snap the peg as early as this month.
Stephen Jen, a currency investor for BlueGold Capital Management in London, argues that if it waits, China could find itself being used as a "domestic political football" by the U.S. as the country heads into its mid-term elections.
Also, if China waits, the country runs the risk of speculative pressure building, something that will only make it that much more difficult to manage the yuan in the longer run.
So why should yen and euro bears care?
If anything, the last time China allowed the yuan to appreciate back in 2005, the Japanese currency benefited in line with other Asian currencies.
But, said Hans Redeker, head of global foreign exchange at BNP Paribas SA in London, there are different forces working this time round.
He pointed to the reduced purchase of U.S. Treasurys by China in the event of a revaluation, which will drive yields higher and encourage even greater flows from Japanese investors out of the yen and into the dollar.
The euro is also likely to suffer from the decline in reserve management, with Beijing having fewer dollar reserves to diversify into the single currency.
This could, of course, add to recent support for the dollar, driving the euro even lower against its U.S. counterpart in months to come.
Economically, the biggest loser if China moves on its currency now will probably be the Australian dollar, as the prospect of reduced Chinese demand hits commodity markets and dents the attraction of the commodity-driven Aussie.
Speculation over an early move by China contributed to a general unease in financial markets early Thursday in Europe, leaving safe havens such as the yen and the dollar higher.
The euro was under pressure again as a request by Greece's four largest banks for access to loan guarantees has increased concern about a capital flight triggered by Greece's debt problems.
General sentiment also hasn't been helped by a sharp decline in Japanese core machinery orders and a disappointingly downbeat economic assessment from Federal Reserve Chairman Ben Bernanke late Wednesday that helped to dampen expectations that the Fed will raise interest rates.
By 0745 GMT, the euro had fallen to $1.3314 from $1.3355 late on Wednesday in New York, according to EBS. The single currency was also down at Y124.08 from Y124.63 while the dollar fell to Y93.19 from Y93.18.
Yen and euro bears, that is.
After months of speculation, the People's Bank of China appears to be on the verge of releasing its yuan peg against the dollar. This will probably allow the Chinese currency to fluctuate in a wider daily band much as it did between 2005 and 2008.
China abandoned the float and fixed the peg when the credit crunch erupted and the global economy headed for recession.
See how the yuan has moved against the dollar in recent years:
Click Image to Enlarge
Now, as more evidence of a global recovery emerges, reducing the threat of a double dip recession, China appears ready to take more drastic action to slow the pace of its own recovery.
Up until now, the PBOC has relied on a gradual tightening in interest rates as well as a slow hiking in bank reserve requirements to prevent the economy from overheating.
But, with Chinese inflation now on the rise, the country looks set to engage other forms of monetary tightening, including an appreciation of the yuan.
Politics is also playing a key role.
After months of threats against Beijing on the issue, Washington appears to have adopted a more conciliatory tone. Last weekend, the previously combative Obama administration indefinitely postponed plans to name China a "currency manipulator" and U.S. Treasury Secretary Timothy Geithner packed his bags for unscheduled talks in the Chinese capital this week.
Market speculators are looking for China to finally move on the yuan as early as July. However, some reckon Beijing could snap the peg as early as this month.
Stephen Jen, a currency investor for BlueGold Capital Management in London, argues that if it waits, China could find itself being used as a "domestic political football" by the U.S. as the country heads into its mid-term elections.
Also, if China waits, the country runs the risk of speculative pressure building, something that will only make it that much more difficult to manage the yuan in the longer run.
So why should yen and euro bears care?
If anything, the last time China allowed the yuan to appreciate back in 2005, the Japanese currency benefited in line with other Asian currencies.
But, said Hans Redeker, head of global foreign exchange at BNP Paribas SA in London, there are different forces working this time round.
He pointed to the reduced purchase of U.S. Treasurys by China in the event of a revaluation, which will drive yields higher and encourage even greater flows from Japanese investors out of the yen and into the dollar.
The euro is also likely to suffer from the decline in reserve management, with Beijing having fewer dollar reserves to diversify into the single currency.
This could, of course, add to recent support for the dollar, driving the euro even lower against its U.S. counterpart in months to come.
Economically, the biggest loser if China moves on its currency now will probably be the Australian dollar, as the prospect of reduced Chinese demand hits commodity markets and dents the attraction of the commodity-driven Aussie.
Speculation over an early move by China contributed to a general unease in financial markets early Thursday in Europe, leaving safe havens such as the yen and the dollar higher.
The euro was under pressure again as a request by Greece's four largest banks for access to loan guarantees has increased concern about a capital flight triggered by Greece's debt problems.
General sentiment also hasn't been helped by a sharp decline in Japanese core machinery orders and a disappointingly downbeat economic assessment from Federal Reserve Chairman Ben Bernanke late Wednesday that helped to dampen expectations that the Fed will raise interest rates.
By 0745 GMT, the euro had fallen to $1.3314 from $1.3355 late on Wednesday in New York, according to EBS. The single currency was also down at Y124.08 from Y124.63 while the dollar fell to Y93.19 from Y93.18.
- 8 April |
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