Wednesday, June 23, 2010

China punctures yuan hopes, only glacial gains seen

SHANGHAI: China's yuan inched higher on Wednesday, June 23, settling down after the biggest swings since 2005 and driving home the message that Beijing's promise of currency flexibility will not produce the rapid gains its trading partners would like.

Whatever its daily gyrations, analysts suspect the yuan will be allowed to rise over time but likely at too slow a pace to narrow China's huge trade surplus, or America's deep deficit.

That could prompt world leaders meeting at a Group of 20 summit in Canada this weekend to press Beijing further over what its new currency policy will mean in practice.

"The de-pegging story was overblown. It lacked substance given China was never going to make huge inroads into revaluation," said Adam Carr, a senior economist at broker ICAP in Sydney, referring to China's decision to scrap the yuan's peg to the US dollar over the weekend.

"More importantly, it over-emphasised the value of the currency in the Chinese/world growth narrative ' an appreciating yuan is not going to rebalance the world," he added.

The People's Bank of China (PBOC) set the yuan's mid-point at 6.8102 per dollar on Wednesday, just slightly stronger than where the currency ended on Tuesday.

The yuan surged nearly 0.5% on Monday to its highest level since China revalued the currency in 2005, but gave back half those gains on Tuesday.

Traders suspected the pullback was officially orchestrated via large dollar purchases by big state-owned banks, as a none-too subtle warning to traders that Beijing will not reward one-way bets that the yuan will only rise.

Yuan gains not a sure thing
Beijing's decision to free the yuan from its near two-year-old dollar peg helped fuel a global market rally on Monday on hopes that a stronger yuan would boost spending in the world's third-largest economy and increase its demand for foreign goods, giving a much-needed boost to a global recovery.

Now, three days into the more flexible arrangement, what is clear from movements in the market is that Beijing still hopes to keep currency movements relatively stable, and investors' euphoria has quickly faded.

"The last three days have showed that hopes for a one-way appreciation are wishful thinking. We can tell that they are quite serious about allowing for two-way fluctuations," said Isaac Meng, an analyst with BNP Paribas in Beijing.

Meng said the yuan appeared to be genuinely tracking a basket of other global currencies this time as opposed to the period from mid-2005 to mid-2008, when the reference to a basket was more in words than in practice.

Still, after two days that saw some of the greatest volatility in the yuan since the revaluation, it was trading in a much narrower range on Wednesday, keeping the market guessing as to what the PBOC's new arrangement will ultimately look like.

A Reuters poll of 33 economists forecast the yuan would rise to 6.67 per dollar by the end the year, an increase of just 2.4% from late last week and similar to the appreciation implied by offshore non-deliverable forwards.

Plenty of trouble elsewhere
As the glow from China's move faded, investors were turning to more pressing problems in the rich world, such as the need for painful fiscal tightening in many debt-laden countries and the risk of deflation.

The euro eased back below $1.2300 while currencies leveraged to global growth like the Australian dollar lost altitude.

The UK on Tuesday became the latest country to announce draconian budget cuts and steep rises in some taxes as it wrestles with exploding national debt.

While debt markets generally welcome massive spending cuts, equity investors worry that such moves could stop the global economic rebound in its tracks.

US existing home sales unexpected fell last month, according to data on Tuesday, highlighting the unevenness of the recovery. ' Reuters


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