The New Yuan Peg: Here’s What It May Mean
After taking their
first step towards a more flexible currency back on July 21st,
we have not heard much from China since then. At the time, China had revalued
their currency by 2% to 8.11 against the dollar and announced their decision to
allow the Yuan to fluctuate 0.3% intraday with a new closing price set at the
end of each trading day. They also announced their intentions to move to a
managed floating exchange rate against a basket of currencies. Since then, we
had been waiting for China to disclose the components of the basket and that was
exactly what we saw this morning.
The People’s Bank of China said today that the main components of the basket
will be the USÂ dollar, the Euro, the Japanese Yen and the South
Korean Won. Other currencies holding a lesser weighting in the basket
are the Singapore dollar, the British pound, the Malaysian Ringgit,
the Australian Dollar, the Russian Ruble, Thai Baht and Canadian Dollar.Â
Although the exact percentage weightings were not disclosed, and we had expect
China to mimic Singapore in not doing so, they did say that the weights will be
based upon how much trade each country does with China as well as how much debt
China owes to each country. China has refrained from disclosing the basket
weightings because it would provide too much information for speculators. We
have long forecasted on www.chinarevaluation.com that if China
decides to peg the Yuan against a basket of currencies, that the basket would
have to include their largest trade partners. As of last year, Europe, the US
and Japan constituted China’s largest trade partners. With the value of
trade between China and Europe and China and the US fairly close, we expect the
dollar and the euro to constitute very similar weightings in the basket with the
Japanese yen tracking not far behind. This announcement has been and will
continue to be very positive for the Japanese Yen and the Euro as the China, one
of the biggest players in the global reserve market gradually aligns their
reserve holdings with the reference basket for their managed float. China also
announced today that they will allow banks who conduct over $2 billion in
foreign trade to trade Yuan forwards and swaps.
The target of a floating exchange rate still remains a possibility, but for now,
we think that China is quite satisfied with the significant changes that they
have made lately and will probably take some time to digest their latest
changes. We do not expect China to make another move for at least a few months,
but what we do see, and what we expect to be consequence of China agreeing
to revalue is increased talk of Chinese firms looking abroad for acquisition
targets.
Kathy Lien
Kathy Lien is the Chief Currency Strategist at
Forex Capital Markets. Kathy is responsible for providing research and analysis
for DailyFX, including technical and fundamental research reports, market
commentaries and trading strategies. A seasoned FX analyst and trader, prior to
joining FXCM, Kathy was an Associate at JPMorgan Chase where she worked in Cross
Markets and Foreign Exchange Trading. Kathy has vast experience within the
interbank market using both technical and fundamental analysis to trade FX spot
and options. She also has experience trading a number of products outside of FX,
including interest rate derivatives, bonds, equities, and futures. She has a
Bachelors degree in Finance from New York University. Kathy has written for
Stocks and Commodities, CBS Market Watch, ActiveTrader, Futures and SFO
Magazine. She is frequently quoted on Bloomberg and Reuters and has taught
seminars across the country. She has also hosted trader chats on EliteTrader,
eSignal, and FXStreet, sharing her expertise in both technical and fundamental
analysis