Currency Trading Information Channel
Chinas New Currency Regime
The base unit for the renminbi is the yuan, which is how the Chinese currency is most commonly referred to. The official ISO abbreviation for the yuan is CNY, but it is also commonly abbreviated in the forex industry as RMB.
The yuan had been pegged at 8.28 to the dollar since 1994. While China has been openly discussing scrapping the dollar peg for several years, many traders weren't expecting a move until later in the year.
The PBC declared that the new regime would be a managed floating exchange rate based on supply and demand in relation to a basket of currencies comprised of the U.S. dollar, euro, yen and the Korean won. The yuan s central rate against the dollar was then adjusted by just over 2% to 8.11. Keep in mind that the RMB exchange rate is quoted in dollar terms, in other words, the dollar is the base rate of this currency pair. A 2% positive revaluing of the RMB results in a 2% decline in the dollar rate versus the Chinese currency.
According to the PBC, the RMB will now be allowed to fluctuate up to 0.3% on any given trading day with the daily closing price then serving as the midpoint of the next day's trading range. That could mean as much as a 6% move in either direction in a month. However, the PBC is very unlikely to allow for that kind of movement and has in fact already intervened in the forex market to prevent the yuan from straying too far from 8.11. With over US$700 billion in currency reserves they certainly have the power to enforce their wishes and it's doubtful that forex speculators will be willing to test the resolve of the PBC in any meaningful way any time soon.
While the floating of the yuan, albeit tightly controlled, is a significant policy shift, the initial revaluing of the RMB is seen as largely symbolic. Chinese president Hu Jintao visits Washington in September and the modest revaluation may have succeeded in heading off a face to face showdown on China's exchange rate policy. Critics contend that the yuan is undervalued by more than 20%, affording China an unfair trade advantage. U.S. manufacturers have demanded as much as a 40% revaluation. A more significant move than 2% is needed to truly affect the massive trade imbalance between China and the U.S., so there will undoubtedly be calls for further RMB appreciation.
So where might the renminbi be headed longer term? One year non-deliverable forward contracts in Singapore rose to RMB 7.64 before edging higher again, suggesting scope for an additional 6% of RMB gains over the next twelve months. More aggressive projections suggest potential for 7% appreciation by year end and up to 15% gains by the end of 2006. However, traders can be assured that any such projections will only be achieved if the PBC will allow it.
Given the tight constraints of the new renminbi regime it is unlikely that CFS clients will see any RMB trades in their accounts any time soon. First of all it will take several months of operation to allow traders to get a handle on how the new managed float will operate. There's just very little transparency at this point.
While there may not be any trading opportunities in the RMB any time soon, China's move has created opportunities elsewhere. Other Asian currencies such as the Japanese yen rebounded on the news, but quickly retraced when it became apparent that the RMB wasn't really going anywhere. The yen is likely to remain under pressure as the dust settles, although near term losses may be a little more tentative while focus remains on China.
The biggest reaction to the policy shift by China, and likely the most sustainable, was seen in the U.S. treasury market where yields shot higher. The new exchange regime suggests that China is likely to be a less reliable buyer of U.S. treasuries as well as the dollar. Higher treasury yields will net higher mortgage rates which may prick the U.S. housing bubble, dampening home sales and the consumer spending commonly associated with the purchase of a home.
Higher corporate lending rates are likely to negatively impact stock prices and the broader U.S. economy. Ultimately we could see a resumption of the long term downtrend in the dollar. While this assessment may seem bleak in a broad sense, this is exactly why alternative investments, such as the Managed FX products of CFS, are an integral part of a diversified portfolio.
The burning question now becomes: are we better off having forced China's hand on their currency policy? I don't think there's any question that the ideal is a free floating and open exchange rate, where market forces set the price and government intervention is limited. However, the pains associated with the aforementioned scenarios may be greater in the near term than any competitive advantage the U.S. might gain as a result of higher yuan.
Peter Grant has spent the majority of his career involved in the global foreign exchange (FX) market. He is the Vice President of Operations for CFS Capital Management http://www.cfscap.com and may be reached at [email protected] or by calling 303-940-7777.
Read the entire CFS Capital Newsletter 'The Alternative', at: http://www.cfscap.com/news.htm
MORE RESOURCES updated Fri. January / 15 / 2021
How to Trade Forex? - A Guide to Forex Trading in 2021 DailyForex.com
What Are the Best Forex Trading Platforms? Market Realist
Why Forex Trading is so Popular in Africa? The African Exponent
Understanding currency trading and its dynamics Nairametrics
USD/INR: Rupee Edges Lower In Risk Off Trading Currency Live
Canada shares lower at close of trade; S&P/TSX Composite down 0.10% Investing.com India
Currency Overview: Digital euro, Turkish awakening and the return of the dollar - Marketscreener.com
Ethereum Falls 11.76% In Bearish Trade Investing.com India
UK shares lower at close of trade; Investing.com United Kingdom 100 down 1.17% - Investing.com India
UK shares lower at close of trade; Investing.com United Kingdom 100 down 1.17% Investing.com India
4 Simple Steps to Start Forex Trading for Beginners Yahoo India News
Asian shares mixed following Biden speech, Wall St retreat Martinsville Bulletin
What Is Forex Trading? Forbes
12 IRS Audit Red Flags for Retirees Kiplinger's Personal Finance
Euromoney Forex: Market dislocation buoys non-banks Euromoney magazine
Market Update 2021: the dollar, the euro and the pound World First Foreign Currency Exchange
US Dollar Index advances to90.60, data eyed Currency Live
Bitcoin is back above $36,000, but big investors are wary - Mark Cuban says crypto is 'exactly' like the .. - Business Insider
Bitcoin is back above $36,000, but big investors are wary - Mark Cuban says crypto is 'exactly' like the .. Business Insider
London Stock Exchange : Bloomberg's Big Challenger Can't Afford to Slip -- Heard on the Street - Marketscreener.com
London Stock Exchange : Bloomberg's Big Challenger Can't Afford to Slip -- Heard on the Street Marketscreener.com
India's Dec trade deficit widens to $15.44 bln Investing.com India
GBP/USD Forex Signal: Bearish Price Channel DailyForex.com
GBP/EUR: Pound Pushes Over €1.1250 Currency Live
AUD/USD Forex Signal: The Bullish Case for the Aussie DailyForex.com
EUR/USD Forex Signal: Bullish Trend Resuming DailyForex.com
US Consumer Sentiment Preview: Expectations look rich, dollar could receive a (second)... - Forex Crunch
US Consumer Sentiment Preview: Expectations look rich, dollar could receive a (second)... Forex Crunch
EUR/USD edges back below 1.2200 Currency Live
USD/INR: Rupee Advances As Stocks Hit Record High Currency Live
Forex Trading Terms You Need to Know Before Trading North Forty News
Forex Brokers: Are They a Scam? | Investing | US News U.S News & World Report Money
What You Need To Know Before Starting A Forex Trading Business NuWire Investor
USD/PKR: Rupee Declines, LSM Rises Currency Live
A Forex Trading Guide For Beginners | Sponsored | state-journal.com State-Journal.com
Bitfarms Announces Closing of Second CAD$20.0 Million Private Placement with U.S. Institutional Investors - GlobeNewswire
Bitfarms Announces Closing of Second CAD$20.0 Million Private Placement with U.S. Institutional Investors GlobeNewswire
A guide to forex trading instruments The Boca Raton Tribune
Inside the weird new world of social ‘forex’ trading—where you sign up friends, and some report risky red flags for investors - Fortune
Inside the weird new world of social ‘forex’ trading—where you sign up friends, and some report risky red flags for investors Fortune
Everything To Know About Getting Into Forex Trading GQ Australia
Alleged RCMP mole accused of selling secrets to kingpin money launderer and terror-financier’s network - Global News
Alleged RCMP mole accused of selling secrets to kingpin money launderer and terror-financier’s network Global News
The FINANCIAL - Making Money By Forex Trading The FINANCIAL
How does the derivatives market work? | MyWalletHero Motley Fool UK
Facts You Need To Know About Forex Trading Forbes India
Dollar Index sees little action as US President-elect Joe Biden unveils coronavirus rescue... - Forex Crunch
Dollar Index sees little action as US President-elect Joe Biden unveils coronavirus rescue... Forex Crunch
How Forex Trading Works Market Realist
Forex Market: Unlocking Opportunities for Investors Visual Capitalist
EUR/USD: Real Money And Hedge Funds Driving Most Of The Selling As Of Late - Credit... - Forex Crunch
DAX Forecast: Continues to Kill Time DailyForex.com
Forex vs. Cryptocurrency Trading, Explained Cointelegraph
What You Should Know About Forex Trading Signals Robotics and Automation News
Timing Entry And Exit When Forex Trading - NuWireInvestor NuWire Investor
NZD/USD bulls taking charge in... Forex Crunch
AUD/USD Forecast: Buyers are Ready to Get Involved DailyForex.com