weekly option strategy

China Remains Global Topic, Fuels Drama Filled Week

Friday, 22 June 2007 19:41:18 GMT  |  Richard Lee, Currency Analyst

Recap Of The Week’s Top Stories…

 

Dealing somewhat of a blow to the Chinese yuan regime, and considered a small victory for US lawmakers, the International Monetary Fund announced today that it was to strengthen its exchange rate policy monitoring.  In the announcement, the IMF plans to insist that its members reject currency policies that create economic instability for global partners, changing a stance that has widely been in place for almost 30 years. 

 

IMF Changes Exchange Rate Monitoring Policy
Dealing somewhat of a blow to the Chinese yuan regime, and considered a small victory for US lawmakers, the International Monetary Fund announced today that it was to strengthen its exchange rate policy monitoring.  In the announcement, the IMF plans to insist that its members reject currency policies that create economic instability for global partners, changing a stance that has widely been in place for almost 30 years.  Obviously aimed atChina, the recent changes in policy helps to boost the expectation of a currency regime change by Chinese officials.  However, given the previous track record of Chinese policy officials, the probability of such an outcome continues to remain thin.  The decision by the IMF received praise from US lawmakers and several key industry heads in the world’s largest economy.

 

 

 

China Reduces Export Rebates, Hopes To Trim Excessive Gap
As previously speculated, it was announced today that China will vastly reduce export rebates on almost 3,000 products in order to curb the widening trade surplus.  The repeal on rebates, which begins on July 1st, would also stand as attempts to calm what seems to be escalating pressure from global trade partners as China’s trade surplus continues to be a concern for nations in Europe and the US.  Incidentally, the decision follows recent legislation by US senators last week that would allow for steeper duties on China imported goods and materials.  Included in the lot of rebate repeals have been products such as toys, textiles and paper according to the finance ministry.  All three products have recently been under intense scrutiny by US trade officials, with some measures to even ban the distribution of products on US soil.  As a result, although positive for trade relations, the decision will more than likely stand as a temporary solution with US representatives clamoring for more.  Competitive fears still loom over the fact that the world’s fourth largest economy continues to harbor a considerable trade advantage and surplus, likely to expand to a record $257 billion according to recent estimates by the Asian Development Bank. 

 

Foreign Stock Markets Open To Domestic Investors
In a move to promote two traffic in the underlying Chinese yuan, government officials signed a memorandum of understanding that is set to take effect July 5th.  In the memorandum, domestic investors, along with brokerages, will be allowed to invest and trade in 33 markets including the US, Hong Kong and Japan.  Subsequently, it also allows for investment in emerging markets like Vietnam and Nigeria.  The decision, historically significant, was ultimately expected after previous plans to allow investment flows outside of the country failed.  Earlier, government officials, hoping to restrain the overheating demand for the local currency, implemented a restrictive quota on the purchase of foreign fixed income products through the qualified domestic institutional investors plan.  Under the plan aptly named QDII, government restrictions were relaxed, allowing banks to place money overseas.  However, it was tepidly received by the market.  Incidentally, expectations are comparatively higher for this plan to succeed as it places no quotas or restrictions on the amount of money funds can invest outside the country. 

 

More ‘Patience’ Is Needed On Yuan Flexibility
The Chinese yuan pared back slightly as comments by central bank Deputy Governor Wu Xiaoling indicated that officials are continuously seeking to stabilize the local currency.  Speaking at a Beijing forum, Wu also stated that global partners must be “patient” over the gradual appreciation in the currency as officials continue to contend with “structural problems”.  The comments come a day after US Treasury Secretary Henry Paulson vowed to be more “creative” with officials in formulating a flexible exchange rate regime.  Incidentally, Paulson at the same time was heavily criticized for the Treasury Department’s decision not to label China a currency manipulator.  While testifying on Capitol Hill, the Treasury Secretary endured questions and comments against the department’s recent report findings, including noted disappointment in Paulson’s approach.  The rising protectionism on both sides will likely keep Paulson impatient, pushing for faster appreciation in the currency.

Resources

• free demo account
• forex courses
• open an account
• forex stream
• free webinars