Sunday, November 07, 2004

Some comment on the yuan revaluation. It now seems that China will simultaneously widen the trading band for the RMB and switch to a basket peg at the same time. As seen in the article below, international currency traders are expecting a basket peg. For those who bet on the yuan, of whom I am not one, they will likely reap more than expected benefits, since a basket peg will provide the yuan with a further de facto appreciation of 1-2%. While this simultaneous move will attract even more hot money, the Chinese government is opting for its usual tactic of more enforcement of foreign exchange rules. The inspection that SAFE carried out late last-month is likely a preemptive strike against hot money. More such inspections can be expected in the near future. Since everyone knows that SAFE enforcement is far from perfect, real estate prices will likely remain buoyant and perhaps regain upward momentum in the near future. Speculators tend to think the real estate market a safer bet than China's unimpressive stock market.

Although I usually do not comment on US politics, I think the continual slide of the dollar increases the urgency of decreasing the US deficit. The recent slide of the dollar will increase the cost of issuing bonds, which further increases the long-term cost of the deficit. If Bush cares at all about the future of this country, he will have to find ways to cut the deficit.

Dollar expected to fall amid China's rumoured selling By Steve Johnson in London and Andrew Balls in Washington Published: November 7 2004 19:43 Last updated: November 7 2004 19:43
The dollar could slide still further, in spite of hitting an all-time low against the euro last week in the wake of George W. Bush's re-election, currency traders have said.
The dollar sell-off has resumed amid fears among traders that Mr Bush's victory will bring four more years of widening US budget and current account deficits, heightened geopolitical risks and a policy of "benign neglect" of the dollar.
Many currency traders were taken aback on Friday when the greenback fell in spite of bullish data showing the US economy created 337,000 jobs in October.
"If this can't cause the dollar to strengthen you have to tell me what will. This is a big green light to sell the dollar," said David Bloom, currency analyst at HSBC, as the greenback fell to a nine-year low in trade-weighted terms.
The dollar's fall comes as the Federal Reserve is widely expected to raise US interest rates by a quarter point to 2 per cent when it meets on Wednesday and to signal that it will continue with a measured pace of rate increases.
Speculative traders in Chicago last week racked up the highest number of long-euro, short-dollar contracts on record. Options traders have reported brisk business in euro calls - contracts to buy the euro at a pre-determined rate.
However, the market has been rife with rumours that the latest wave of selling has been led by foreign governments seeking to cut their exposure to US assets.
India and Russia have reportedly been selling US assets, as well as petrodollar-rich Middle Eastern investors.
China, which has $515bn of reserves, was also said to be selling dollars and buying Asian currencies in readiness to switch the renminbi's dollar peg to a basket arrangement, something Chinese officials have increasingly hinted at. Any re-allocation could push the dollar sharply lower and Treasury yields markedly higher.

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