Jim O’Neill On The CNY Regime Change

Monday, June 21st, 2010

From Goldman’s Jim O’Neill:

A large number of people have been asking me for my thoughts since the news was announced on Saturday. I have been in St Petersburg for the annual Forum- a bit more of which below-so I was unable to write over the weekend. Any in case, a number of pieces have been published by the ECS team, including from Thomas Stolper on the near term FX implications (bullish risk currencies), Fiona Lake (on how a real China TWI might move /be managed) and of course, from everyone in Asia on the move itself; Helen Qiao, Yu Song and Mike Buchanan. Many of these folks will be on a webcast this morning.

Here are my 2 cents briefly;

1.     What specifically is happening, and will happen to the CNY? Like many others, I went to bed last night thinking that how Beijing allowed the fix to move today would be key. In fact, it was unchanged, and since then spot has moved notably from 6.8275 down to 6.8055 last print. I am reminded, that truly technically, today’s fix reflects the previous days trading, so in this regard, where we close will determine tomorrow’s fix, and in some sense today’s fx was not relevant. Given that the PBOC statement said that the daily trading band will not be widened ( beyond the 0.5pct which it has never experienced), this means the limit for today is 6.7930 I believe. Of course, it also means if this is all true, then we could have in theory a maximum 2.5pct rise of the CNY against the Dollar this week. I guess if that happened, and you times it by 52 even Congress would be happy,  a 130pct move….I doubt that Mr. Schumer……

It will be fascinating to see where it closes today, fixes tomorrow, and is allowed to trade.

2.     If they are going to indeed pursue a more genuine trade weighted peg, then this actually means what happens to EUR/$ is important. In this regard, the China move adds to my belief that it is really risky to be short Euros these days (and has been amongst the reasons in recent weeks as to why I could no longer be so bearish as it was obvious a CNY move of some sort was coming). Washington will want to see more CNY strength vs. the $ and this will make it , marginally, more harder for the Euro to be “allowed” to weaken.

Tags: Annual Forum, Asia, Beijing, Belief That, BRIC, BRICs, China, Congress, Currencies, Ecs Team, Genuine Trade, Gold, Goldman, Mike Buchanan, O Neill, Peg, Regard, Regime Change From, Russia, Schumer, St Petersburg, Stolper, Twi, Webcast
Posted in China, Emerging Markets, Energy & Natural Resources, Gold, Markets, Oil and Gas | Comments Off