Posted on 06/22/2010 1:59:19 PM PDT by bruinbirdman
Oil prices and risky assets across the world have tumbled after China intervened to weaken the yuan, sending a clear signal to investors that the country's shift to currency flexibility is a two-way street.
The yuan depreciated to almost 6.82 against the US dollar under the new crawling peg, which allows the currency to fluctuate by 0.5pc on either side of a reference point.
Analyst said there had been heavy activity by state lenders, suggesting the central bank had used proxies to intervene. "They're introducing two-way volatility in a way that China likes to do things," said Standard Chartered.
Euphoria after the weekend announcement caused commodities to surge, with rallies in equities, credit, and 'risk currencies' such as the Australian dollar. But momentum faded in New York late on Monday, as markets began to question whether the move was really a transforming shift for the global economy, and European debt worries returned to the fore. Oil fell almost $3 to $77.5 a barrel in Asian trading.
Albert Edwards from Societe Generale said it is unwise to assume that the yuan must strengthen as controls are relaxed, arguing that China's export miracle is fragile. "I think they will devalue when the global economy goes into a double dip recession".
Yi Xianrong from China's Academy of Social Sciences said there will be no repeat of the sharp moves from 2005 to 2008, when the yuan rose 21pc against the dollar. The plunge in Europe's currencies has already caused a 14pc appreciation against the European bloc this year, with an impact that has yet to feed through.
China's commerce ministry has opposed a rise in the yuan, fearing that it could endanger exporters with wafer-thin margins in the textile, toy, and electronics sectors. The central bank has gained the upper
(Excerpt) Read more at telegraph.co.uk ...
Imports from China are now going to cost more. That means they can buy more Treasuries.
Yep, it’s a good move for China. Rather then having to buy treasuries to keep the USD high, the USD will be allowed to fall.
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