Saturday August 15, 2015 - 13:18:31 GMT
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China Changes Curency Regime
John M. Bland
A More Flexible Forex Policy The Peoples Bank of China roiled the markets in the latest week when it announced a more flexible approach to setting the value of its exchange rate. Rather than managing the value in a set range vs. the USD, under the new system the fluctuation band will now be set around the previous closing value. China has been under a lot of pressure from the IMF to move to a floating exchange rate system before the Yuan could become a part of the SDR. This was an opportune time for China to change, with a higher USD pulling the currency stronger against other currencies while the Chinese economy was already weakening. The yuan fell by about 5% in the week, and likely will decline by another 5% or so more against the USD gradually over the rest of the year. In my opinion, equity markets overreacted to the news, falling over the week.My guess is this story will fade as a market factor quickly now as the pace of the yuan devaluation becomes more gradual. Chatter the decision could impact a Fed decision to raise interest rates in September is far-fetched.
Forex Market Developments Otherwise the USD continues to trade in the broad range which has held most of the year. Forex markets continue to be strongly influenced by the performance of equity markets, as a lot of large trading positions in shares have been financed in EUR with so-called "carry trades". High-powered investors have been using cheap EUR loans to buy stocks all year. Thus when USD-denominated stocks weaken, and stocks are sold off. the USD proceeds of the stock sales are converted back to EUR to pay off the loans used to buy the shares in the first place, So when stocks weaken the EUR tends to trade stronger. Another strong current influence in forex markets has been the falling price of oil. As oil falls, energy stocks weaken and as equities weaken the EUR strengthens, as explained above.
Weekly Calendar The upcoming week is a moderately active period for major economic data. -- Monday, August 17, JP- GDP, US- Empire PMI. -- Tuesday August 18, GB- CPI, US- Housing Starts/Permits. -- Wednesday August 19, US- CPI, FOMC Minutes. -- Thursday August 20, JP- BOJ, GB- Retail Sales, US- Existing Homes Sales, Leading Indicators. -- Friday August 21, Global- flash PMIs, CA- CPI and Retail Sales Be sure to refer daily Global-View to see the continuously UPDATED Economic Calendar and the Forex Forum for the complete list of key items (actual data, selected charts, etc.) as they are released.
John M. Bland co-founder www.global-view.com
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