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Home Opinion Opinion China to abandon exchange rate policy?
China to abandon exchange rate policy? PDF Print E-mail
Written by Mark Deans at MoneyCorp   
Monday, 08 March 2010 12:24
This morning's Mark Deans column: Yuan to appreciate? Yen the loser on US employment data - Little for the market to feed on today.



Good morning.

Food manufacturers in Yorkshire and Humberside (which used to be Yorkshire) are campaigning for the same naming rights for Yorkshire Pudding as those enjoyed by Champagne, Parma ham, Stilton cheese and many other local specialities.

Gearing up for similar protection are the makers of Scotch eggs, Swiss rolls, baked Alaska and Welsh rarebit, all of which are in with a shout.

Chicken Chennai faces all sorts of problems but the Kent economy will receive a huge boost if Sandwich wins its case.

Although that possibility was not uppermost in the minds of investors on Friday they were inclined to look upon pound sterling in a more favourable - alright, less malicious - way.

The chance of a Monetary Policy Committee reaction to higher inflation remains remote, given the Bank's recent comments about the temporary nature of the price spike.

Even so, Friday's producer price data showed a continued widening of the gap between manufacturers' costs and factory gate prices. This implies improved gross profitability for producers and so ought to be good news for the economy and the currency.

Also, if factory gate prices continue to rise at an annual rate of around 7% it is hard to imagine how they will not eventually feed through to the consumer. The market tends not to react to producer price indices but those on Friday were enough to deter the bears.

All the euro could offer were January's figures for German factory orders. They were impressively strong, with monthly and annual increases of +4.3% and +19.6% respectively, but investors have never been worried about the strength of the German economy. Their concerns relate to Greece, Spain, Portugal, Ireland and Italy.

And those concerns have diminished as a result of Greece's successful bond issue last week and a thaw in North European resistance to the idea of a financial bailout in extremis. Even though Angela Merkel offered George Papandreou nothing more than warm wishes and a rabbit's foot, Nicolas Sarkozy was more forthcoming. In his own meeting with the Greek prime minister the French president said he would stand 'resolute' with Greece and told the naughty speculators to stop being so nasty about Greek government bonds.

The highlight on Friday was, after all, the US employment report. The rate of unemployment did not go up, as investors had been expecting and non-farm payrolls fell by 36k, little more than half the -65k that the more pessimistic among them had been prepared for. The news had a positive impact on risk-appetite and a mixed effect on the US dollar. It jumped higher against the yen and lost ground on most other fronts. The antipodean dollars were the main beneficiaries but sterling also gained some support, adding two yen and one Cable cent.

This week has begun with some dreary Japanese money supply and lending data and boring Swiss unemployment figures (steady at 4.1%). It has also given the market chance to consider the significance of comments by China's central banker at the weekend.

Zhou Xiaochuan told China's parliament (it meets once a year, whether it needs to or not) on Saturday that Beijing would eventually have to abandon the exchange rate policy which has kept the yuan steady against the US dollar for more than 18 months.

He described it as a 'special' policy, designed to help the country through the financial crisis, and implied that it was only a temporary measure. China will not immediately loosen its grip on the yuan but the governor's mention of the subject almost certainly means a degree of appreciation will be allowed against the US dollar, perhaps 5% this year. History suggests that a stronger yuan would take other Asian currencies along with it. It could also be moderately positive for the Aussie and Kiwi dollars.

Today's remaining figures are few; Euroland investor confidence, German industrial production and Canadian housing starts. The lack of hard data will leave investors to ponder the CBI's call for a rapid return to a balanced UK budget and two more opinion polls that point to a hung parliament. Barring accidents it will probably not be a landmark day for the currency market.
Last Updated ( Monday, 08 March 2010 12:27 )
 

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