The Wall Street Journal reports,"an important shift in global currency alignments has been occurring with the quiet decline in the value of the yuan engineered by the People’s Bank of China.
With other emerging-market currencies still under great pressure – see Turkey’s lira today, as well as the Ukrainian hryvnia – China’s hitherto appreciating currency had been creating an imbalance, adding an unwanted burden to its all-important export sector as its economy slowed. But now that the yuan is trading at six-month lows versus the dollar, the overvaluation is being corrected. Chinese exporters are no doubt relieved, but the question now is: What does that do to investment flows that had been for a long time bet on the conventional wisdom that the yuan would continue to rise? That inflow of funds, particularly from Hong Kong residents earning near-zero rates on their dollar-pegged savings, was an important source of liquidity, both for productive investments and for speculative purposes.
CHINA: The yuan weakened to a six-month low against the U.S. dollar on Tuesday, extending an abrupt wave of weakness since last week. The dollar now buys 6.1115 yuan, sharply up from 6.0984 yuan at Monday’s close. The pair earlier hit an intraday peak of 6.1250, the highest reading for the dollar since hitting 6.1272 on Aug. 22 last year. It was the yuan’s biggest daily drop since Jan 28, 2011.
While some of the yuan’s weakness can be attributed to investors’ concerns about China’s slowing economy and latent risks in its financial system, there is also a growing perception that the Chinese central bank has been proactively undermining expectations for the yuan to relentlessly appreciate. With the yuan recently trading closer to the PBOC’s dollar-yuan reference rate, conditions are ripening for a widening of the yuan’s trading band, that by which the PBOC allows the yuan to move 1% above or below the reference exchange rate. The band was last widened in April 2012, when the permitted deviation from the reference rate was 0.5%. Analysts expect Beijing to widen the trading band further, and allow a 1.5% or 2% deviation in the next few months.
UKRAINE: The Ukrainian hryvnia fell another 2% overnight to reach new lows as investors wait to see whether the country will secure emergency financial help from the European Union and the International Monetary Fund.
Investors continue to absorb the political implications of Ukraine’s political upheavals. The bond market remains well supported but the currency has continued to slide .(AM)
TURKEY: The Turkish lira hits a two-week low after disclosed tapes purported to show Prime Minister Recep Erdogan discussing hidden funds in the latest installment of a long-running graft scandal that has shaken his government.
