The dollar drops while China rocks. China has either given in to pressure or has realized that its peg to the dollar may soon become counterproductive.
China shook the global markets by announcing that they were going to allow their currency to be more flexible. As expected, oil soared on the news because the move will make oil cheaper in China and may inspire more Chinese buying of more commodities! Yet will this be for the long haul as a stronger yuan may slow exports by making Chinese goods more expensive overseas. For now though it is a commodity buying spree as the markets react to what most people feel will be the most obvious result. The Wall Street Journal says that China’s central bank's statement Saturday came as a surprise and effectively marked the end of currency's de-facto peg to the U.S. dollar. It has been seen as a clear signal that China will let the yuan resume a gradual rise against the U.S. dollar after nearly two years of being effectively pegged around CNY6.83 to the U.S. dollar. Property developers were among the biggest gainers, as a stronger yuan would attract fund inflows and strengthen demand for real estate in China. Of course another round of property buying in China raises concerns of a real estate bubble in China. China has moved to rein in real estate by increasing the down payment requirements dramatically earlier this year.
The Wall Street Journal reports that China's yuan surged to its highest level against the U.S. dollar in the modern era Monday afternoon due to strong demand from both onshore and offshore traders following the central bank's weekend announcement that it would make its exchange-rate regime more flexible. Traders said the market will closely monitor the People's Bank of China's daily dollar-yuan central parity rate for cues in the coming sessions. If the fixing remains close to Monday's 6.8275, reflecting the central bank's focus on stability, the dollar could rebound strongly Tuesday, they said. Which I think is a strong possibility. If the dollar rebounds then oil will fall so if you are long you cannot get too complacent that oil will stay strong. This is probably setting up for a great fade the news trade. Of course your sell point will be key! Yet how quickly that comes really may be when China’s policy is clear. Market Watch Reports that China left the Yuan’s trading band unchanged Monday, belying some expectations that the range against the U.S. dollar would be eased immediately after the central bank signaled an end to its de-facto peg to the greenback. The U.S. dollar's central parity for the day was set at 6.8275 yuan, the same as on Friday, according to the China Foreign Exchange Trade System & National Interbank Funding Center. The Yuan’s peg weakened against other major currencies, with the euro fixed at 8.4825 yuan from 8.4538 yuan Friday, and the British pound at 10.1382 yuan from 10.1139 yuan, while the peg for 100 Japanese yen was set at 7.5500 yuan, up from 7.5151 yuan. In each trading session, the central bank allows the dollar-yuan to move up to 0.5% in either direction from the central parity rate, while other currencies are allowed to move up to 3% from the parity.
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at email@example.com