China may be pursing a new policy

China may be pursing a new policy designed to help support coordinated efforts by U.S. and European officials to stabilize markets, while also curbing inflation at home, according to analysts, who pointed to a sharp appreciation in the yuan against the U.S. dollar last week.

The U.S. dollar traded at 6.3895 yuan in over-the-counter transactions Friday, with the yuan rising 0.8% for the week, its fastest weekly pace of appreciation in at least a year. The advance bring the yuan’s cumulative rise against the greenback to 3.1% for the year, or about 6.8% since June 2010, when Beijing allowed the currency to resume movement against the dollar.

“This was an important move to augment earlier initiatives by the Federal Reserve and the European Central Bank to stabilize volatile global financial markets this week,” wrote DBS analysts in a note Friday, referring to the moves by China’s central bank to fix the yuan’s rate below 6.4 yuan to the dollar Thursday.

The trend continued on Monday, as China’s central bank set the dollar’s daily trading-range midpoint at 6.3950 yuan, compared to Friday’s setting of 6.3972 yuan, a level that represented a fresh high for the currency pair.

The dollar extended the slide to trade at 6.3921 yuan by midday Monday, though still off the over-the-counter record from Friday.

Traders cautious

Currency traders cited by Dow Jones Newswires said dealers were cautious after the dollar’s big losses last against the yuan last week.

Some were of the view that the marginally stronger setting of the yuan’s daily fixing on Monday was a signal Beijing remains committed to gradual appreciation of its currency.

However, DBS said last week’s advance in the yuan appears to have been coordinated with Federal Reserve Chairman Ben Bernanke’s statements Tuesday to hold interest rates at a low level for an extended period, and announcements on Thursday by four European Union countries to ban short-selling of selected banks and financial institutions.

There was also speculation that China may be allowing faster appreciation to help defuse criticism after July data showed it racked up a bigger-than-expected trade surplus of $31.5 billion.

That contrasted with the U.S., where data showed a worse-than-expected trade deficit in June.

DBS said U.S. lawmakers may be considering legislation to force China to change its currency regime, though it didn’t spell out what form those measures would take.

On the home front, DBS said China may also be looking to a stronger yuan to hold down the price of imports.

China’s consumer price index inflation accelerated to a three-year high of 6.5% in July, exceeding consensus expectations for a 6.3% rise.

The currency moves came as an official with China’s foreign-exchange regulator called for a widening of currency-trading bands in emerging economies.

“Widening a currency’s trading band would lead to the appreciation of the effective exchange rate and narrow the current-account surplus because it will increase imports and decrease exports,” said Zhang Zhuo, with the State Administration of Foreign Exchange’s Capital Account Management Department, according to a Dow Jones Newswires translation of the remarks.

By 

M.Zohaib Gadit

Forex Trading Consultant, Shivani Financial

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