Forex report: Yuan rises on new policy

Investors are falling all over each other as an almighty risk-rush caused by the Peoples Bank of China has directed traders to put greater stock in a global recovery. Bond prices fell alongside the dollar while physical commodities rose on optimism that if the Chinese authorities are confident enough to allow the yuan to rise against the dollar it must signal domestic recovery involving the consumption of copious volumes of copper and crude oil. The yuan rose towards its highest value in five years as dealers realized that the central bank was committed to allowing the unit to rise just ahead of a G20 meeting at the weekend.

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Aussie dollar – In proving that there is indeed more than one way to skin a rabbit the Chinese central bank is improving the lot of domestic manufacturers and consumers while at the same time bearing down on inflation. That relative improvement also reduces the nation’s traditional export-reliance to grow its fortunes. Most currencies that stand to benefit from exporting to China rose in value today. The Aussie dollar reached a five-week high against the dollar today at 88.59 U.S. cents.

Canadian dollar – The Canadian dollar is looks like the pick of the bunch today. The revitalized note of confidence from China instills faith in a likely commodity rally, which directly helps the Canadian economy. It also removes a speed bump from the path to further monetary policy measures at the Bank of Canada. Unlike other currency units where the risk rally is wilting in early going, the loonie appears to be accelerating rather than pulling back. It’s currently near its intra-day high trading at 98.43 U.S. cents and it probably won’t be long before investors are predicting parity again with the U.S. unit.

U.S. Dollar – Meanwhile the display of confidence in global economic growth helped rejuvenate risk appetite today. The PBOC hitched the yuan to the dollar at a rate of 6.83 yuan two years ago to help exporters weather the financial meltdown. The decoupling at the weekend is a sign of a better climate while it also allows the PBOC to fight inflation without raising interest rates. The dollar index is trading on both sides of unchanged with the most obvious dollar change occurring against the Japanese unit.

Japanese yen –The yen sank per dollar to ¥91.47 from ¥90.73 ahead of the weekend. Most Asian units rose against the dollar following the announcement as investors anticipate that the PBOC relaxation will mean better things for Asian exporters to China as consumers feel wealthier. The yen also lost out to the single currency declining to ¥113.02 while against the British pound it fell to ¥135.29.

Euro – The euro jumped against the dollar initially reaching its best level in three weeks at $1.2468. At this stage it’s hard to say that the implication for the euro is wholly bullish simply because the PBOC appears more confident in global economic growth. The euro later slipped back to rising hourly trend support at $1.2350. However, we can now say for certain that last week’s sharp rally for the euro was accompanied by a sharp drop in bearish sentiment. Last week’s CFTC data showed a decline in the number of short positions in the euro through the weekend. The number of bets against the euro had challenged a recent record peak but data showed last week’s rally saw bets against the euro almost halved as investors caved in against what they felt had been an easy-bet against the unit. Positions fell from nearly 112,000 to 62,000.

British pound – The pound reached a five-week peak against the dollar at $1.4936 as investors reacted to the Chinese revaluation by buying currencies that would bask in economic growth. Tuesday’s emergency budget is currently being previewed with optimism as the new coalition government is stamping its authority on the sizeable national deficit through hearty spending cuts. The pound is currently trading at $1.4815 as it tests Friday’s closing price.

Andrew Wilkinson is a senior market analyst at Interactive Brokers. ibanalyst@interactivebrokers.com

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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