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Forex: The Chinese yuan revaluation
Economics Weekly: Economic Research and Analysis
The Chinese yuan revaluation
The widely expected revaluation of the Chinese yuan was finally announced last week, but appears to have had minimal impact on the currency market. Caught out by the surprise move by the PBoC on Thursday, dollar bulls returned to the fold late on Friday, suggesting that more pertinent issues like G7 interest rate and growth differentials may drive currency markets again this week. The 2% yuan revaluation to US$8.11 from 8.28 is not large but will still have the effect, in the medium to long term, of weakening the dollar, as markets price in future revaluations of the yuan. The Chinese decided last week to move to a managed exchange rate system (details are still sketchy), one that prepares the way for eventual full convertibility of the currency. .
Indicator summary for the week ahead
UK economic indicators released this week will provide the latest view of the housing market and also offer investors the first view of the consumer impact of the terrorist attacks on July 7th. Recent data suggest that UK house prices are stabilizing and this should be further confirmed by the Nationwide survey for July out on Thursday morning. Annual price growth may continue to slide, but what needs to be remembered is that monthly price falls have so far been limited and often cancelled out by rises in subsequent months. Mortgage lending data from the BoE on Friday should also show that recent activity remains on an upward curve, with both approvals and net lending expected to hold up well. Consumer confidence for July will offer a first insight of how the terrorist attacks of a fortnight ago are changing consumer attitudes. Despite falling to the lowest since December 2004 (-3) in the June survey, a further deterioration cannot be ruled out. Two weeks after the 2050 gilt auction debacle, the DMO will this week tap the gilt market for £400mn of 2025 index linked paper on Tuesday. The issue carries a coupon of 2.25%.
Indicators to watch out in the US are headed up by July consumer confidence and durable goods orders
(Jun) early in the week and climax with the first estimate of Q2 gdp growth on Friday. The first estimate for Q2 GDP is forecast to underline the robust shape of the US economy. The run of strong data in
June suggests a positive surprise could be in the offing. Confirmation that economic momentum held up at the pace of Q1 should put an end to speculation that the Fed may pause when fed funds reach 3.50% in August. Unless the GDP report also flags a worrying rise in inflation, we should see a return to flattening curve action for treasuries. Weighed lower by the yuan revaluation last week, a strong GDP reading could elicit fresh dollar support.
The run of strong positive news for the eurozone is expected to continue this week, with the German IFO the key release on Tuesday. The business climate index should rise for a second month in July, possibly breaking through 94 for the first time since February (95.4). Continuing robust EU-12 M3 money supply growth in June will again underline that the chances of a rate cut from the ECB are remote, especially following on from the stronger inflation numbers seen last week. The flash estimate for July EU-12 CPI is due out on Friday.
Jeavon Lolay, Senior Economist
Kenneth Broux, Economist
Lloyds TSB Bank,
London EC3R 8BQ
0207 283 - 1000
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