weekly option strategy

Emerging Markets: Chinese Yuan Boosted On Hopes of Further Flexibility

Friday, 10 August 2007 16:07:29 GMT  |  Richard Lee, Currency Strategist

Recap Of The Week’s Top Stories…

Chinese Yuan Appreciates On Wider Trade Balance
Appreciating during the session, the Chinese yuan was boosted by speculation that Chinese officials will be more flexible when it comes to the currently rigid exchange rate regime.  Against the US dollar, the Chinese yuan gained to 7.5723 in the overnight session while advancing to 15.2812 against the British pound.  Supportive of the advance was news that China’s trade surplus had widened to the second highest on record, surging 67 percent against figures a year ago.  According to the General Administration of Customs today, the surplus widened to $24.4 billion compared to $14.6 billion this time last year.  The figure will more than add to growing tensions with policy makers in the US Congress, calling for more flexibility and further legislation in order to curb the effects of a fixed currency.  Subsequently, many in the market are already expecting an appreciation of 6.2 percent over the next 12 months.

Yuan Appreciates On Central Bank Comments
The Chinese yuan was supported in the overnight making gains across the board.  Appreciating against the US dollar, the yuan was able to post the biggest advance in just under three week, gaining to 7.5665 while rising against the British pound at 15.33.  In its second quarter monetary policy assessment, the country’s central bank noted that a bigger market role will be taken into consideration when gauging valuation of the Chinese renminbi.  “China will increase the yuan’s flexibility” according to the report, as the People’s Bank of China would maintain the value of the currency at a “reasonable level”.  Although miracles won’t be happening any time soon, the fact that the central bank blatantly made statements in regards to the potential change gives hope to yuan bidders.  It also confirms what forward traders have been expecting.  Currently contracts are suggestive that the currency will appreciate slightly over 6 percent in the next year.

Shanghai Stock Markets Continue To Skyrocket Higher, Yuan Pares Back
Even as the yuan pared back slightly against the US dollar and Euro in the overnight session, Shanghai stocks continued to advance.  In the New York session, the underlying currency was trading lower against the greenback at 7.5705, while against the Euro at 10.4416.  Lending to the short term rebound in the USDCNY pair were technical support levels that the market was eyeing since the close yesterday.  However, that didn’t stop the benchmark stock markets from ratcheting higher, closing at record levels once again.  The benchmark Shanghai Composite closed up 23.12 points at 4,651.23 as the smaller Shenzhen Index added 0.74 points to close up at 1,351.11.  Shares of steel producers continued to lead the way as Baoshan Iron & Steel gained another 5.7 percent while Wuhan Iron & Steel advanced by 2.1 percent.  Petroleum & Chemical rose subsequently on the commodity bid tone, advancing by 5.3 percent to 15.19 yuan.  With positive earnings still expected in the near term for Chinese companies, equity gains may not be fully realized yet, helping speculators to see past the already 60 percent gain in the index. (August 7th)

Chinese Yuan Pares Back, Government Threatens With US Bonds
The Chinese yuan pared back against the US dollar, British pound and the Euro in the overnight session following a surprise  announcement by Chinese officials.  In response to recent US trade sanctions that have been levied on Chinese imported products, officials in Beijing have stated that any further coercion towards revaluation in the yuan currency would be met by potential selling in US Treasuries.  Officials were referring to the $900 billion in US Treasuries currently owned by the Chinese government through domestic reserves.  Although the threat does have some merit, the likelihood may not be as forthcoming as an unloading of US assets would be far more detrimental to China and the global arena.  As a result, many in the market are betting on more of US asset boycott, stalling any further purchases of US Treasuries in the near term.  One thing the announcement does show, however, is the strong resolve officials have in moving the currency at their own pace.  Ultimately, traders sided against recent speculation during the session, which hoped for near term changes for a more flexible foreign exchange rate regime. 

-Richard Lee, Currency Strategist

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