The government officially allows the currency to vary by as much as 0.5 percent each day around the initial benchmark, but it has restricted the actual daily variation for the past two years to around 0.01 percent.
Although there has been much focus on the fact that China will upvalue the renminbi, China has made clear in its statement that the movement will be gradual. The tight floating bands will not change. Of more interest is the basket of currencies that China will use in its benchmark. This is something I have focused on, and also Nouriel Roubini, according to Reuters:
China's decision to move away from its currency peg might mean the yuan weakens against the dollar instead of strengthens as Washington wants, Nouriel Roubini, one of Wall Street's most closely followed economists, said on Saturday.Roubini's point about the possibility of the renminibi falling against the dollar, depending upon the mix of the basket is interesting. However, of more interest is China moving away from a simple dollar peg and back to a "basket of currencies" peg that they used in the 2005 to 2008 period. This move will mean less demand by China for Treasury securities--, of course, the size of the change will be dependent on the mix of the basket of currencies and the size of the role the dollar will play in the basket. This is the most important factor in China's announcement, which at this point MSM seems to be missing because of their fixation on trade battles and currency wars. The trade battles are important points BUT how much Treasury debt China will likely need to buy now that they are going to value their currency based on a basket of currencies instead of the dollar is most significant.
China said on Saturday it would gradually make the yuan more flexible after pegging it to the dollar for nearly two years, a move that the U.S. government and others around the world have long been calling for.
"This is the first significant signal in years of a change in Chinese currency policy," Roubini... told Reuters.
But it remains to be seen how China would put the new system into practice including the composition of a basket of currencies that Beijing will use as a reference point for the yuan -- also known as the renminbi -- and the base date for that basket, he said in an e-mail.
"Since they have not changed the previous range for the band -- plus or minus 0.5 percent -- most likely on Monday China will allow the renminbi vs U.S. dollar to move," said Roubini.
The yuan has risen sharply in recent months against the euro, which sank over Europe's debt problems, so a stronger yuan could not be taken for granted, he said.
If the euro were to continue to depreciate, "the renminbi would have to be allowed to depreciate relative to the dollar, a paradoxical outcome," Roubini said.
Effect on gold prices?
ReplyDeleteMike Shedlock has been calling for a renminbi crash should it be decoupled from the dollar.
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