- The yuan rose the most since a July 2005 revaluation and forwards jumped after China’s central bank ended a two-year peg before a Group of 20 summit this week. (Bloomberg)
“So the important thing in a military operation is victory, not persistence.”
FX Trading – The China currency script?
China pulled the trigger on the quid pro quo of not being labeled a “currency manipulator” by the US government, by announcing a move to a crawling- instead of the effective fixed-peg exchange rate system they have been employing. The key word in the last sentence may be “crawling.” One can crawl at varying speeds.
…theoretically speaking, the reasoning may be something like this:
1) Help reduce global market trade tensions; a trade war sinks all boats
2) Begin that process of making it cheaper for Chinese companies to import stuff
3) Start the process of weaning off the Western consumer by increasing relative domestic purchasing power of your own consumer
4) Make sure workers hankering for a pay raise understand the rising yuan is a pay raise
5) Continue to make yuan convertibility possible at the margins and reduce the need to mop up so much money domestically
The potential upshot of all this (China’s actions will ultimately speak louder than words):
1. Blunting of rising Chinese prices (reduced domestic liquidity and more control of own monetary policy)
2. Reduction in US Treasury market buying i.e. less recycling
3. Increase in imports and relatively more balanced trade
4. Reduction in “hot money” flow to China in hopes of a one-off big revaluation
5. Relative pressure valve for European currency depreciation
6. Maybe the risk aversion/risk appetite correlated world changes
Stay tuned. Perception and reality will once again be clear after we are granted the gift of hindsight.