Currencies

  • The recent yuan devaluation closed the gap between the fix and the spot.

    Which Yuan Do We Watch?

    When China engineered a mini-devaluation of the yuan in August, it succeeded in closing the prior gap between the fix (central reference rate) and the spot onshore yuan.  One of the prices of doing so, however, was the widening of the gap between the onshore (CNY) and offshore (CNH) yuan. 

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  • Key economic developments firm antipodean currencies.

    Where Currencies Stand (and Fall)

    There are three key developments today. After seemingly spending recent months pursuing a controversial political agenda, Japan's Abe has returned his attention to the economy to propose corporate tax cuts. This lifted the Nikkei a stunning 7.7%.  The UK industrial output and trade figures disappointed.

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  • Is the yuan moving closer to becoming a global currency?

    Going Global with the Yuan

    According to Dan Steinbock, the internationalisation of the renminbi is accelerating. The inclusion of the yuan in the IMF basket of reserves is now a matter of time.

    On August 11, the People’s Bank of China (PBOC) adjusted the exchange rate of the Chinese renminbi (RMB) against the US dollar to reflect market conditions. The net effect was a devaluation of 1.9% relative to the dollar.

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  • Currencies have been on quite a ride against the dollar.

    The Divergent Monetary Policy Theme and the Dollar

    The US dollar has been on a roller coaster ride. Many have lost confidence in the underlying trend.  An important prop for the dollar, namely the prospects for the Fed's lift-off, extends again, this time ostensibly due to the heightened volatility of the financial markets, apparently sparked by events in China.

    The September Fed funds futures have nearly fully priced out the risk of a hike next month. The effective Fed funds have traded 14-15 bp this month, and the September Fed funds contract implies an average effective rate of 17.5 bp next month.

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  • Yuan valuation has changed, though it's not a floater yet.

    One Step Backwards could be Two Steps Forward for the Yuan

    The redback’s managers excel in catching the currency markets off-guard. In January 1994, China unified its dual exchange rate system by aligning the official rate to the market rate and pegging the yuan to the dollar tightly thereafter. Since 85 percent of yuan trades occurred at market rates at the time, the de facto overall devaluation was a mere 5.25 percent — not the 35 percent that is commonly (mis)quoted.

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  • No one appears to want to be short the dollar before the next Fed meeting.

    Peering into the Future(s) of the Dollar against other Currencies

    The gyrations in the foreign exchange market spurred by the panicked response to Chinese machinations may have been the last spasm before the summer doldrums grip the dollar. The Dollar Index had its worst week in nearly two months, but all that really happened was a move to the lower end of its ranges. The recent string of US economic data suggest that Q2 growth is closer to 3.0% than the 2.3% of the most recent estimate, and that Q3 has begun on firm footing.

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  • Digital currency regulation is playing catch up with Bitcoin's popularity rise.

    Digital Currency Rules and Bitcoin's Future

    The tax treatment of digital currencies is a challenge for governments around the world, as it is for other aspects of the “disruptive” digital economy.

    In October 2014, the Commonwealth Senate Economics Committee launched an inquiry into digital currencies. The Committee released its report last week, with a particular focus on tax.  Last year, the ATO published several rulings outlining how bitcoin and similar cryptocurrencies should be treated under the Australian income tax and GST regimes.

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  • The expected market overreaction to China's move has moderated.

    The Market Reaction to the Yuan Subsides

    It is understandable.  China's move on Tuesday caught the market off-guard.  After seemingly re-pegging the yuan to the dollar, it pushed it reset the yuan to the lower end of its 2% band and announced a new mechanism that seems still to be largely a "black box",  in the sense of lacking much transparency. 

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  • The dollar bloc shows signs of stabilization amid currency rotation.

    Major Currency Dollar-Orbits Appear to be Changing

    The US dollar posted gains against all the major currencies last week save the Australian and New Zealand dollars. The Reserve Bank of Australia appears to have moved to a more neutral stance on rates, relying on the currency to provide the necessary adjustment. 

    A strong July auto sales, a jump in the service sector ISM, and a jobs report that was consistent with recent trends helped the dollar’s gains.  Over the course of the week, the September Fed funds futures contract priced in a greater risk of a September hike. 

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