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Yuan market disconnect sparks debate

Nov 12 2012, 15:37 IST
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The inability of Chinese regulators to cool off a sustained yuan rally against the dollar has led some to predict Beijing will be forced to accelerate the pace of currency reform.   (Reuters) The inability of Chinese regulators to cool off a sustained yuan rally against the dollar has led some to predict Beijing will be forced to accelerate the pace of currency reform. (Reuters)
SummaryThe inability of Chinese regulators to cool off a sustained yuan rally against the dollar has led some to predict Beijing will be forced to accelerate the pace of currency reform.

of a wider liberalisation package that includes interest rate reforms and capital account opening. Traders also pointed out that the last time the PBOC widened the band, it did so when the rate was stable. Before another widening is implemented, they said, the bank will need to get the spot market back in line with the midpoint.

SOURCES OF STRENGTH

Many speculated that the charge of the yuan was originally provoked by Beijing to provide rhetorical ammunition to U.S. President Barack Obama's re-election bid, but now traders credit market-driven demand.

Companies accumulated too many dollars when the yuan depreciated over the first seven months of this year, while China's recovering exports and increasing trade surpluses in recent months have added to the dollar supply, said a trader at a major state-owned bank in Beijing.

A trader at a European bank in Shanghai concurred, adding that the glut could persist for the next few weeks.

The bank has easy options to hand. It can stick with the current strategy and use the midpoint to bluntly hold back the market, or it can intervene to vacuum up the dollar glut.

We think they'll intervene to bring the spot up (weaken) to the fix, said Minikin of Standard Chartered, adding that some anomalous trades over the past two weeks suggest the bank is already doing so.

Such a surge occurred in the last hour of trading on Friday, which some traders speculated was the beginning of a sustained attempt to force the spot market back in line.

However, the do-nothing option may also be viable. Few believe the yuan' s current strength is tenable.

There are short-term factors, maybe geopolitics, maybe optimism about the Chinese outlook, but that is only temporary, said Kowalczyk of Credit Agricole.

The balance of payments data doesn't support more appreciation. China needs to turn to policies supporting growth, and that will require a weaker yuan.

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