Tracing China Rate Hike And Positive Dollar Index Correlation

By world market pulse team on October 20,2010

It’s been a down bound journey for the US Dollar in the distant past. After being under immense pressure in recent times the US Dollar not only witnessed its worst month since May 2009 against a basket of currencies and was caught in the currency war crossfire but an Improved Home Builder Confidence helped the dollar improved across the board following improvement in the housing market survey. All three of the HMI’s components registered gains in October. The index of current sales conditions improved by 3 points to 16, the index for sales expectations for the next 6-months rose 5 points to 23 and the index gauging traffic of prospective buyers rose 2 points to 11. The improved data gave investors an excuse to lay off the buck as it briefly put into question the extent of Fed easing.

Our analysts at World Market Pulse had already discussed the case of a positive US data triggering the Dollar Index in an earlier article. But more than the US Data, the real thrust in the US Dollar appears to come from least expected quarters after a surprise move by China raised its one year lending and deposit rates by 25 basis points. Despite a number of Fed officials indicating that the US central bank will soon embark upon further monetary stimulus for the US economy it would appear that the Chinese may have done something the Fed had been unable to do and that is to stem the tide of negative sentiment against a rapidly falling greenback. Testimony to the fact is that yesterday’s US dollar rally was the largest one day move up in the US dollar index since the 11th August, and if sustained throughout the remainder of this week could well be the start of a new phase of dollar strength.


Overview Of Chinese Rate Hike: China’s central bank today raised its benchmark interest rates for the first time since December 2007, following signs the China’s economic slowdown is bottoming out in recent months. The interest rate increase comes as the economy has shown signs of rebounding from its slowdown in recent weeks, and ahead of a range of important data later this week. August retail sales quickened to 18.4% y/y, while industrial output quickened to 13.9% year/year, and both are forecast to accelerate further when September
figures are released. Lending has also been strong, with new loans raising some 596B renminbi in September.

China Benchmark Interest Rates




USD-CNY Projections: While Chinese currency appreciation may not quite match the pace of the past month going forward, analysts still forecast a gain of a little more than 1.5% per quarter, targeting a USD/CNY rate of CNY6.25 in a year’s time, or a gain of around 6.5% from current levels. Moreover China’s domestic monetary policy measures (reserve requirement increases or interest rate hike) should act as a constraint on liquidity or offer more attractive returns on renminbi funds, which should both contribute to an upwards bias for the Chinese currency.


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Is Global Currency War A Clear Advantage To The Chinese Yuan?

By world market pulse team on October 09,2010

As the global economies, business and market trends change momentum towards the east, the relationship between a country's economy and its currency is getting much more complicated as governments across the globe are assuming a bigger role in propping up the financial system and encouraging economic growth. What started as a small echo with allegations on China to knowingly undervalue its currency has now grown into a currency war after the Japanese government's intervention in the currency markets by weakening the Yen for the first time in six years while the counter strike from the Dollar came when the FED announced the readiness to introduce a new round of quantitative easing to boost the economy. Such has been the impact of the recent currency games that IMF chief Dominique Strauss-Kahn has now joined those warning that governments are risking a currency war if they try to manipulate exchange rates to solve domestic problems.

Experts meanwhile feel that if the currency games continue for a long term, investor confidence in international currencies could break down to such an extent that it could lead to sharp changes in the near future. A few forex experts and analysts have expressed concern that Chinese Yuan could very well emerge as the next preferred currency of global trade as and when the dust settles down from the current tit for tat mechanism. If investor confidence is shaken up badly by the prolonged currency tug of war, the absence of any other credible alternative to the US dollar as the reserve currency of choice might just work in favor of the Chinese Yuan.

According to Joseph Yam, a former chief executive of the Hong Kong Monetary Authority, the yuan should become fully convertible, the domestic debt market in China should acquire depth, and a robust financial infrastructure should be put in place if the Chinese Yuan has to emerge as the preferred choice of the investors in the near future.

China and Hong Kong had earlier agreed to loosen rules regulating trading of the yuan in the territory in July, tweaking rules to allow the sale of yuan-denominated financial products and giving companies greater access to yuan funds. Much of the trade settlement business came from companies looking to re-denominate to yuan away from the US dollar, which most companies operating in China use to pay and issue invoices.


Although skeptics have questioned an such possibility because China as of now runs a balance-of-payment surplus by keeping its currency artificially pegged might find it extremely difficult to take the yuan global without changing its export focus but Guonan Ma, senior economist at the Bank for International Settlements believes that it isn’t entirely necessary for the yuan to become fully convertible for it to be gradually internationalized. There is another argument saying that if China can work its way around the problem by building good institutions, established rule of law, property rights, good corporate governance with long-term bond markets and stringent regulations

Meanwhile China’s central bank, the People’s Bank of China, has already been trying to do by establishing currency swap agreements with central banks around the world.

The depreciation of the Yuan compared to the Dollar has already caused a growing tension between The U.S and China in recent weeks. The U.S is blaming the cheap Yuan for its economic issues and even financial sanctions against China have been on the cards. If these two giant economies are starting to threaten each other, the impact on the ever-slowing recovery could be enormous.

Reality Of The Chinese Currency Drama: China, from its earliest civilizations has always been a clever economy and it's certain that it would not enter into an economic suicide by blindly imitating the west. It is also quite clear that the Chinese government would not allow their currency to go down with the dollar ship as most of the export dependent companies of China which form big chunk of current Chinese economy may lose steam as most of them work on very thin margins. Although economists continue to be skeptical about the goodness of the Chinese currency moves, there is no doubt that China is ready to resume greater flexibility with its yuan.

Political Complications: Although financial analysts are divided over the issue, most political observers have been quite unanimous in saying that whether the yuan becomes more international if at all, politicians and Chinese policymakers are likely to loose their degree of freedom, as there would be deep international repercussions of their policy measures.

Whatever might be the case, most economists are of the view that the rise of the Yuan or renminbi is desperately needed as a multipolar system actually helps in stabilizing the international monetary system.

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World Currencies - projection for present and coming week

CHINA : There may be some movement on the Chinese Currency index. Renminbi US Dollar index based ETN is showing some movement and it may be bullish over next few days.

Indian Rs. : Indian currency Rupee is bullish this week and may remain so for coming week.

Russia : Russian Ruble may make a good move in next few days.

Australia : Australian Dollar Futures AD or ETF FXA continues to be bullish on intermediate period of next few weeks even though it may be down today.

Canada : Canadian Dollar Futures CD or etf FXC is pretty bullish for the day and for the coming week.

Swiss Franc : Swiss Frank like Euro still down but it may do some up move over next 2 weeks. Futures today had a good 125 pips move.

Europe : The common European Currency EURO appears very bullish and may continue to be bullish next week. Eur move may only be limited to little more than a week.

USD : US Currency may remain down for this week and perhaps coming week. Second week April could lift it up.

BRAZIL : The brazilian Real is surely for a good up move.