Thursday July 28, 2005 - 10:05:27 GMT
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INVESTICA Ltd - www.investica.co.uk
Yuan gains resisted
The dollar hit tough resistance around the 112.8 level against the yen, but the US currency found support above the 112.0 level after the yen strengthened briefly after a Shanghai news report which stated that the yuan would be set by market forces. The People's Bank has also pledged to introduced yuan derivatives such as futures markets which will reinforce speculation over a move to give the yuan greater freedom in the medium term. The near-term indications, however, suggest that the Chinese authorities will aim to keep the currency little changed which will lessen the potential for near-term yen buying.
The Chinese yuan on Wednesday weakened to the weakest level since the revaluation, reinforcing the People's Bank determination to prevent speculation over further currency gains. The yuan edged stronger in Asia on Thursday, with a move to 8.108 against the dollar, but substantial gains will be resisted.
The Japanese retail sales data was slightly stronger than expected with a 0.1% monthly increase for June. More importantly, the latest capital account figure recorded strong inflows of overseas capital into Japanese stocks. This buying will offer some support to the Japanese currency, although some may be hedged against currency risk which would lessen the potential benefit for the yen. There will also still be concerns over the domestic political situation with speculation over a general election if the postal reform legislation is blocked. Yield considerations will remain crucial with the yen still at a considerable disadvantage until there are clear hints over a shift in US policy.
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