Friday, December 5, 2008
Has China decided to allow the renminbi to depreciate against the dollar?
From Neil Mellor at the Bank of New York.
"For the first time since China abandoned its peg to the USD, it appears that the authorities there are now targeting a weaker CNY."
"Perhaps the clearest signal of the apparent change of policy, however, came from the currency market itself. Having fallen steadily from July 2005 onwards, USD/CNY’s downtrend came to an abrupt halt on July 16th of this year as the authorities stopped moving the daily band lower. The NDF market duly took this apparent shift in stance to heart with the one-year NDF rallying aggressively from mid-July onwards. Between July 18th and the end of last month the market moved from predicting a 6.1% y/y decline to calling for a 3% y/y rally.
Since the start of this week, however, there appears to have been a further palpable shift in policy. Following a clear shift in the wording in the latest quarterly monetary policy report and a speech over the weekend by President Hu Jintao (warning that China’s competitiveness and trade strength were being threatened), the PBOC on Monday set the central parity rate of USD/CNY aggressively higher. After four and a half months of sideward trading, the market reacted strongly to this apparent change in attitude by pushing USD/CNY to the top end of its band. The reaction in the NDF market was even more dramatic with the one-year NDF jumping 3.16% (its largest ever one day move in either direction). This upward pressure has continued over the last two days to leave the NDF now forecasting a 6% y/y rise (spurred on today by comments from Vice premier Wang Qishan that China will do all it can to stabilise exports)."
Interesting, July 2005 is exactly when housing stocks peaked. The reversal in the renmimbi trend could be very important.