here is a new article out:
Wednesday, April 20, 2011 - 13:35
Analysts: Prospects Of Stepped-Up Yuan Strength Lifts Asia FX
By Vicki Schmelzer
NEW YORK (MNI) - The prospects of stepped-up Chinese yuan strength, perhaps even a revaluation of the yuan, led to widespread buying of Asian currencies Wednesday.
Other emerging market currencies and commodity currencies, such as the Aussie and Canadian dollars, benefited from renewed Asian currency strength as well as from overall dollar weakness being in the majors.
In recent comments, Chinese officials have made it clear that they will pull out all the stops in order to fight inflation, including allowing the yuan to rise further faster.
In early April, Chinese Premier Wen Jiabao stated that the government will include the exchange rate in its policy combinations to tame inflation.
"We will further improve yuan formation mechanism and increase yuan exchange rate flexibility to eliminate monetary conditions that fuel inflation," Wen said in his speech to a State Council meeting.
Vice-Governor Hu Xiaolian said Tuesday that greater exchange rate flexibility and more reserve requirement increases are among the tools that the People's Bank of China will use to curb surging inflation pressure,
Hu also said that interest rates will be given a greater role in managing domestic inflation expectation.
She said that price tools, including interest rates and the yuan exchange rate, will be used in the government's efforts to tame rising inflation.
"We need to improve the yuan exchange rate formation mechanism (and) increase exchange rate flexibility to ease imported inflation pressure," she said.
Asian currencies, already rising in response to these remarks, got kick higher from comments released overnight, suggesting scope for a revaluation of the yuan.
Earlier, Xia Bin, an advisor to the PBOC, spoke of the need for the yuan to move higher.
"We need gradual yuan appreciation. The yuan floating band may be slowly widened from now on... but this band widening will be slow at the beginning before the frequency may pick up," he said in an online question and answer session on sina.com.
"We can't rule out the case of a one-off (yuan) appreciation as well," Xia said.
Overnight, the PBOC set the yuan central parity rate versus the dollar at CNY6.5294, a new yuan high and beating the prior record high of CNY6.5301, set last Friday.
The yuan is up 26.75% since July 21, 2005, the day China freed the yuan from its long standing peg to the dollar in favor of a managed float with reference to a basket of currencies (includes that days 2.0% revaluation).
Rumors were fast and furious Wednesday, with some players talking about a revaluation as early as this weekend and a magnitude of 10%.
Analysts downplay the prospects of an imminent reval and maintained that the PBOC will likely opt for a faster pace of yuan appreciation instead.
"If they were to carry out a one-off reval, then I would imagine 5% would be undertaken," said Nick Chamie, global head of emerging market research at RBC Capital Markets.
The PBOC would opt for 5% over 10% - "no more than that as they firmly believe in gradual policy moves to avoid disruptive shocks," he said.
Win Thin, global head of emerging market strategy at Brown Brothers Harriman, put the odds of a yuan revaluation at 25%.
"With regards to currency policy, we are putting forth the following three possibilities along with odds: 1) keep current pace of appreciation (10%), 2) do one off revaluation (25%), and 3) speed up pace of appreciation (65%)," he said.
BBH's base case is that the PBOC will increase the pace of yuan appreciation "back to double digits (65%)," he said.
"We also believe other tightening measures will be seen, both orthodox rate hikes as well as more unorthodox macroprudental ones that include reserve requirement hikes and potential price controls," Thin said.
Still other analysts were wondering that if the PBOC really means business, then a one-off revaluation might be only the start.
If the PBOC did do a 10% revaluation, it would "catch the market off guard" and "take the pressure of the sure bet that the renminbi will appreciate day by day and month by month," one analyst observed.
A Hong Kong Centre for Economic Research piece from July 1998 offered background on Chinese foreign exchange policy, which have seen sizable adjustments in the past.
"From 1981 to 1993 there were six major devaluations in China. Their amounts ranged from 9.6% to 44.9%, and the official exchange rate went from 2.8 yuan per U.S. dollar to 5.32 yuan per U.S. dollar," the report said.
"On January 1, 1994, China unified the two-tier exchange rates by devaluing the official rate to the prevailing swap rate of 8.7 yuan per U.S. dollar," the HKCER said.
Either a revaluation of the yuan or heightened yuan appreciation would take the pressure off of other Asian central banks, which would rather use the FX rate instead of monetary policy to combat rising commodity and energy prices.
"Faster (Asian currency) appreciation may help them fight inflation," one Asian analyst said.
This week, Asian currencies risen sharply on heightened global investor and speculative demand.
Dollar-Malaysia ringgit bottomed earlier at Myr3.0135 and came close to last week's lows at Myr3.0110, which were already the lowest levels since Oct 1997.
The Korean won rose to new 2011 highs Weds, with dollar-won falling to a low of Krw1078.10, levels last seen in August 2008.
Dollar-ringgit held at Myr3.0165 and dollar-won at Krw1078.10 Wednesday afternoon.
