June 21 2010Asian currencies given China boost
Asian currencies jumped higher on Monday after China announced that it was ending the renminbi’s de facto dollar peg over the weekend.
The People’s Bank of China, which has effectively pegged its currency against the dollar since July 2008 in a bid to shield its exporters from the financial crisis, said that it would pursue a more flexible exchange rate that reflected market demand and supply conditions “with reference to a basket of currencies”.
The central bank added that since the upturn of the Chinese economy had become more solid with enhanced economic stability, it was desirable to proceed further with reform of the renminbi exchange rate regime.
The PBoC added, however, that there was no basis for “large-scale appreciation” in the currency.
Indeed, the central bank left its daily reference rate, about which it allows the renminbi to trade by plus or minus 0.5 per cent, unchanged from Friday.
But after initial disappointment that the PBoC had not pushed the fixing rate higher, the renminbi advanced sharply.
The renminbi rose 0.4 per cent to Rmb6.7964 against the dollar, its biggest daily rise since China introduced its de facto peg against the US currency in mid-2008.
In the 12-month forwards market, the renminbi rose 1.3 per cent to Rmb6.6235 against the dollar, implying that traders expected a 2.8 per cent appreciation over the coming year. Six-month forwards rose to imply a 1.6 per cent appreciation.
Elsewhere, global markets reacted positively to the news given that sentiment was supported by the reduction of tensions between the US and China over currency policy and also the PBoC’s bullish statement on the economy.
This helped lift the currencies of Asian countries that export to and whose exports compete with China.
Hans Redeker at BNP Paribas said the fact that China appeared to be signalling a gradual appreciation of the renminbi was positive for risk appetite.
“It sends the positive message that China feels confident enough about the economic outlook to allow a move, but limits the inevitable tightening effects of currency appreciation,” he said.
“Asian currencies and stock markets are all up significantly.”
The South Korean won was the largest beneficiary, rising 2.4 per cent to Won1,173.20, its strongest performance for 14 months.
Meanwhile, the Malaysian ringgit rose 2.1 per cent to M$3.1840 against the dollar, while the Indonesian rupiah climbed 0.8 per cent to Rp9,010 and the Taiwan dollar gained 1.2 per cent to T$31.740.
The currencies of commodity producing countries also benefited.
The Australian dollar rose 1.4 per cent to $0.8844 against the US dollar, while the New Zealand dollar climbed 1 per cent to $0.7136 and the Canadian dollar gained 0.4 per cent to C$1.0172.
Elsewhere, the dollar and the yen came under pressure as haven demand for both currencies waned.
The dollar eased 0.1 per cent to $1.2397 against the euro, lost 0.2 per cent to $1.4869 against the pound and dropped 0.1 per cent to SFr1.1069 against the Swiss franc.
The yen fared worse, losing 0.8 per cent to Y91.36 against the dollar.
Gareth Berry at UBS warned against overreacting to the news from China, however.
He said that the news did not signal a big revaluation of the renminbi.
“China’s statement specifically mentions that no basis exists for a large-scale appreciation of the currency,” said Mr Berry.
“So while China will allow its currency to resume strengthening again, the macroeconomic impact on global trade and capital flows as well as on inflation rates will be limited. Thus the long-term reaction of exchange rates should be marginal too.”
Ft.com
