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Yuan's rise won't last amid weak exports
By Alaistair Chan |
October 11, 2012, Thursday
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Print Edition
Print Edition
CHINA has just celebrated the National Day holiday and many locals took advantage of a cut in road toll charges - a "mini stimulus measure," according to the government - by going for a drive. Highways across the country turned into sprawling parking lots as an estimated 85 million people took to their cars.
But although the country's roads were clogged, the government avoided an analogous situation in money markets. In the lead-up to the break, the People's Bank of China conducted a record amount of reverse repo operations - buying back securities it had issued for cash - to enhance liquidity in the banking industry. Stocks jumped when the central bank announced 365 billion yuan (US$58 billion) in open market operations. Speculation arose that it was a backdoor easing of policy, but more likely it was a precautionary measure to avoid a cash crunch during the weeklong public holiday.
Demand for yuan was high because exporters and other corporates were loath to hold dollars in case of a jump in the yuan, which has occurred in the past when the government announced major stimulus measures around major holidays.
The yuan has retraced all losses incurred this year, but this probably won't last, as the export situation remains fragile.
The yuan has reversed its declines against the dollar and has reached a new post-peg high. The yuan had depreciated as much as 1.5 percent so far this year, but reversed course in August and September as expectations of a new round of US Federal Reserve quantitative easing grew.
However, markets are not convinced that the yuan will continue its upward path. Twelve-month yuan forwards imply that the yuan will be almost 2 percent weaker in a year.
In our view, this is an acknowledgment that the export environment is still weak and that the dollar is likely to rebound as the US economy improves.
But although the country's roads were clogged, the government avoided an analogous situation in money markets. In the lead-up to the break, the People's Bank of China conducted a record amount of reverse repo operations - buying back securities it had issued for cash - to enhance liquidity in the banking industry. Stocks jumped when the central bank announced 365 billion yuan (US$58 billion) in open market operations. Speculation arose that it was a backdoor easing of policy, but more likely it was a precautionary measure to avoid a cash crunch during the weeklong public holiday.
Demand for yuan was high because exporters and other corporates were loath to hold dollars in case of a jump in the yuan, which has occurred in the past when the government announced major stimulus measures around major holidays.
The yuan has retraced all losses incurred this year, but this probably won't last, as the export situation remains fragile.
The yuan has reversed its declines against the dollar and has reached a new post-peg high. The yuan had depreciated as much as 1.5 percent so far this year, but reversed course in August and September as expectations of a new round of US Federal Reserve quantitative easing grew.
However, markets are not convinced that the yuan will continue its upward path. Twelve-month yuan forwards imply that the yuan will be almost 2 percent weaker in a year.
In our view, this is an acknowledgment that the export environment is still weak and that the dollar is likely to rebound as the US economy improves.
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