Thursday July 21, 2005 - 12:27:54 GMT
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Forex: China Reval First Blush
China Reval First Blush
First the 2% reval is not much considering Snow let it be known something close to 10% met the smell test. However, China said it will adjust the peg ahead as conditions allow which is an implicit embrace of a crawling peg, if not defined (no timetable nor daily/wkly change).
The basket is not so significant for non-yuan currencies. The dlr will likely make up about 80% of the basket, euro and yen the rest. I doubt A$ or KRW for instance will be included. So there is unlikely to be a great need to say add euro and yen to the current PBOC FX reserve mix (suspect it did this in advance). The basket reduces volatility in as much as large swings in euro/dlr previously would imply large change in euro/RMB. With basket the volatility in the constituent currencies translates into reduced volatility in yuan.
Look for a statement from US Tsy shortly. I suspect it embraces the move which will imply that in private China has promised to follow this initial step with more moves ahead, getting close to 10% within 12-18 months. If Tsy gives move a thumbs down it will indicate that China has not committed to more moves in the near- to medium-term.
So I think this is a bullish Asia signal...think getting to 10% is implied, surely 5% can't be far off.
Think it is too early to expect a marked decline in dlr accumulation in China and hence US Tsy, agency and corporate demand. But the implication is as China moves more the need to accumulate dlrs will decline. So think then ews is bearish Tsy mkt, albeit it not the conundrum slayer a floating yuan would be.
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