Friday April 29, 2005 - 10:22:43 GMT
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INVESTICA Ltd - www.investica.co.uk
Time for yuan policy change?
The latest Chinese media comments are potentially very important and there is now a 50% chance that the Chinese authorities will move to change the yuan regime over the next week. The most likely outcome would be a widening of the trading band, possibly to around 5.0%. The change could also be allied with a switch to a trade-weighted basket. Under this scenario, the yen could strengthen to at least 102.5 against the US currency with general Asian currency appreciation. The dollar could weaken to around 7.80 against the yuan. The dollar could be subjected to wider selling pressure, but the Euro would probably not gain sharply as Asian appreciation would ease underlying upward pressure on the Euro.
The yen strengthened in Asia on Friday even though Tokyo markets were closed for a holiday. The yen extended gains to 105.1 against the dollar in early Europe, primarily due to intense speculation over a yuan policy shift.
The speculation over a yuan revaluation has been fuelled by comments from a state run financial newspaper. The Securities Journal stated that, following reforms of the commercial banking sector and foreign exchange market, conditions were now ripe for a policy change. The Chinese markets will also be closed next week which will increase the attractiveness from a Chinese perspective of making a policy change. The rumours were also increased by the fact that the yuan briefly traded outside its trading band. The latest comments follow a flurry of reform hints over the past two weeks. Overall, the chances of a yuan policy change over the next week are now around 50% with the most likely outcome a wider trading band, potentially of around 5.0%.
There is likely to be major reservations over holding short yen positions over the weekend due to the possibility that China could announce a change in exchange rate policy. This speculation will offer near-term support to the Japanese currency, especially as there are still a high number of short yen positions.
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