China widens Yuan trading band, here’s who wins
The currency market
which has been warily keeping an eye on the satellite imagery of Rita in the
Gulf of Mexico was momentarily rocked out of its storm watch slumber when the
Bank of China announced that it was widening the yuan’s trading band against the
euro, yen and the Hong Kong dollar.
The yuan will be allowed to move as much as 3%
against those currencies versus the prior limit of 1.5%. The move verticalized
all of the majors but within 20 minutes the euro, pound and the franc returned
to their pre-news levels and only the yen retained most of its gains. The yen,
of course is the primary beneficiary of any yuan appreciation for two reasons.
First, China is Japan’s biggest export market, so any increase in the yuan will
generate larger profits for Japanese businesses through currency appreciation.
Secondly Japan actively competes against China in global markets and any yuan
strength will make Japanese products more attractive against their Chinese
counterparts. The move comes on the eve of the G-7 summit meeting and is most
likely intended to dissuade any protectionist policy moves against China.
After the momentary flutter the market settled
back to the nights ranges with dollar generally stronger against all currencies.
Concerns about Rita abated somewhat when the Hurricane was downgraded to
category 4 and appeared to be headed east of Houston. At this point every FX
trader has become an amateur meteorologist with satellite imagery sharing
desktop space with price graphs. However, the true impact of Rita will not be
known until landfall this Saturday and with no economic data from US on the
calendar today, the market is unlikely to become to aggressive ahead of the
weekend. One nasty possibility, projects Rita stalling in front of the Texas
coast for several days, pelting the area with 80 mph winds and torrential
rainstorms. With German elections still unresolved, the market remains at a
standstill as neither US nor Europe offer much of a reason to be long.
Boris Schlossberg serves as Senior Currency
Strategist with Forex Capital Markets in New York, the largest retail forex
market maker in the world. He is a monthly contributor to SFO Magazine with
articles focused on understanding proper risk management, trader psychology and
true market structure. He is also a featured expert at
www.fxstreet.com and a frequent
commentator for the Marketwatch From Dow Jones Currency and Bond Report
sections.