Yuan Revaluation

[trendy]

Watching Bloomberg TV here and a interview with US Tres Sec Snow about the US having a forex team in China to help them. He went on about them having to revalue the yuan etc. Interestingly with last weeks long holiday in China/Japan the Chinese have opened a special forex trading day on Sunday and have another planned for next weekend. To me it looks like them must be going to revalue any day? So what do you forex experts think? Also what will it do to the USD/NZD rate?

[arco]

Analysts say that if the yuan, which has been pegged against the dollar for about a decade, were allowed to trade more flexibly, that would spark a broad rally in Asian currencies and put the dollar under pressure.

For currency investors, buying Japanese yen is a popular proxy bet on a near-term move by China.

If China's yuan rose against the dollar, that would allow other Asian central banks to relax efforts to artificially weaken their currencies against the dollar and still keep their exports competitive with China's.

Chinese Vice Finance Minister Li Yong said on Friday he did not think upward pressure on the yuan was so great, but urged currency speculators to be patient over yuan reform.

Treasury Secretary John Snow on Friday reiterated the U.S. position that China's financial structures are strong enough to allow the yuan to float now.

http://yahoo.reuters.com/financeQuoteCompanyNewsArticle.jhtml?duid=mtfh1753 7_2005-05-06_20-59-01_n06606341_newsml

[trendy]

Arco appreciate that but arhh maybe I'm thick when it comes to forex... so which way will the NZD go up or down? If the Yuan becomes strong doesn'that mean the USD is going to become weaker?

[arco]

Trendy

I try not to get too involved with the fundamental issues
surrounding the various currencies because their inter-
relationships are quite complex.

NZD has had an amazing run and if you subscribe to EW theory
then you will know a major run such as we have had has to correct
at some point.

IMO currency trading can be more profitable using short term swing trading techniques. An average of 50 pips per week can make
you very happy (and rich), whereas long term holding can often
be a very frustrating business.

arco

[arco]

China's most plausible option for a revaluation of the yuan would be to repeg it at the same level as the Hong Kong dollar, according to emerging markets guru Mark Mobius.
Mobius believes a full-blooded change to a floating Chinese currency is unlikely; rather he sees Taiwan as a model where the authorities only gradually relaxed their firm grip on the New Taiwan dollar as they reformed their exchange rate system.

"If you look at the pattern of what has happened in Taiwan you get a pretty good idea of what could happen with China. They will want to keep controls in place."

What is more, said Mobius, aligning the yuan to the Hong Kong dollar's exchange rate makes sense as part of the economic integration of Hong Kong and China, and to cement the city's role as the capital-raising center for China.

On the investment outlook for emerging markets generally, Mobius remains optimistic despite fears rising U.S. interest rates would bring a bull run in this volatile asset class to an abrupt end.

For Mobius, the key to the direction of emerging markets is to watch the interest rate spread between U.S. Treasurys and JPMorgan's sovereign emerging market bond index. For now it is holding steady at about 3.5% as global investors still find these assets attractive.

"But all you need is a little mistake in places like Brazil or Russia...and you'll find the spread widening and a loss of confidence. That's what we are living with."

[arco]

Floyd Norris: Will China be setting U.S. rates?
Floyd Norris International Herald Tribune
FRIDAY, MAY 13, 2005


In Washington these days, complaining about China has become standard operating procedure. The Bush administration regularly calls on China to allow its currency to rise and Congress talks of taking steps to punish China for not doing so.

Be careful what you wish for.

As speeches of low-level Chinese bureaucrats are read with care for hints as to just when Beijing will allow its currency to rise, perhaps it would be better for Americans to ponder the impact that China's current policies are having.

Some might wonder just why the American politicians are upset. The way things work now, China sells to the world most everything the world wants. China then uses the dollars it receives to buy Treasury securities. That helps to hold down U.S. interest rates and stimulates consumer spending, enabling Americans to buy more from China.

You can understand why China might not like to keep doing that forever. Those Treasury securities don't pay much interest, and they are sure to decline in value, measured in yuan, when that currency is allowed to float. But the largest vendor financing program ever has stimulated the Chinese economy.

In Washington, the theory is that China's keeping the yuan low increases the U.S. trade deficit. That is true, but it is far from clear that allowing the currency to rise a bit would either stimulate American exports or reduce imports.

What it could do is cause American interest rates to rise.

A decision by China to halt or even reduce its vendor financing program might not cut into sales very much, but it would force Treasury securities to find other buyers, particularly if other Asian central banks decided that they, too, wanted to sell dollars. The official explanation would be that they were diversifying their foreign-exchange holdings. With the U.S. government selling huge quantities of Treasury bills, notes and bonds to finance the budget deficit, rates could rise as other buyers demanded better yields.

And if that were to happen, the impact could be acute in the housing market, where low interest rates have helped prices to soar. Investors in housing stocks have been nervous for some time, happy to see the good news in the form of ever-higher profits but worried that the good times must end and fearful that they could be left holding the bag.

One stock where those conflicting emotions have played out is Pulte Homes, a homebuilder active in 27 U.S. states. Last autumn, its share price fell when it reported problems in Las Vegas, which was perhaps the most overheated market in America. But price cuts in that market got homes selling again, and all seems to be well. The stock has been rising again.

Pulte filed its quarterly report with the U.S. Securities and Exchange Commission this week, disclosing that its land inventory continues to grow. Some of that land is owned, while the rest is controlled via purchase options that give it the right to walk away - forfeiting what it paid for the option - if sales soften.

Kathleen Shanley, a bond analyst at Gimme Credit, points out that the company's inventory is concentrated in areas where home prices have been rising rapidly and that its cash flow is negative, even as profit soars, because of all the land it is buying.

When things were at their worst in Las Vegas, Pulte was seeing cancellations of home purchases that amounted to 75 percent of new sales.

"The risk of similar, and perhaps more prolonged, regional downturns should not be ignored," Shanley wrote in a note to clients.

Rising interest rates could be a cause of such downturns. Homeowners with fixed-rate mortgages would be relatively immune, although they could find it harder to sell if they needed to, and the flow of cash from mortgage refinancings would dry up.

But many buyers, particularly in some of the hottest markets, have resorted to adjustable-rate mortgages. A lot of pain for them could provide a real damp

[Xerof]

Worth a read on this subject.

http://www.fxstreet.com/nou/content/106020/content.asp?menu=market&banner=bsc

Also interesting developments re HKD peg adjustments announced earlier - HKMA doesn't want speculators using HKD as a proxy for CNY



Xerof