A new season is here, complete with new attitudes. China’s weekend announcement that it would give the yuan greater ‘flexibility’ quickly became the dominant financial news item and driver of many a market value. Certainly, that was the case if one took a glance at movements in Asian currencies and equities, as well as U.S. Treasuries. Not to mention certain base metals. We just did. Copper prices moved up by their daily 5% limit in Shanghai- the most in a month. Rubber prices gained traction and rose the most in one week after the yuan announcement.
Crude oil climbed to a six-week high above $78 pbbl in the wake of the news. There is, of course, another side to the Chinese coin at this juncture. Namely, that if investors continue to view the yuan’s ‘flexibility’ move through the prism of economic recovery, then the safe-haven theme that gold has hitherto enjoyed may take a back seat to risk appetite (for other commodities and assets).
The statement from Beijing came less than a week before G20 leaders meet in Toronto and represents a departure from a 23-month period during which the Chinese currency was effectively pegged to the dollar. Just days ago, China warned that the topic of the yuan’s exchange rate was to be off the table at the G-20 summit. The weekend statement preemptively defuses any potential pressure from being applied upon Beijing in Toronto next week.
Speaking of which, the focus at that round table is, of course, expected to be the European debt issue. As Bloomberg’s William Pesek puts it, “Those much-coveted AAA credit ratings mean less with every passing day as the biggest economies issue more and more IOUs. It would be a crime if the G-20 left Toronto without exploring how to restore trust.” Meanwhile, the euro quietly slipped higher (1.24) but gold appeared to be taking cues from elsewhere last night. The dollar was last seen at near 85.50 on the trade-weighted index.
The PBoC stated in recent months that the pegged exchange rate was in fact one of the “anti-crisis policies” introduced in 2008 in order to help support the economic recovery, and thus, such an "accommodation" would eventually end up being removed. In that sense, none of what took place on Saturday should come as a shock to anyone. An increase in inflationary pressures coupled with robust export growth drove decision makers to allow for some appreciation against the USD.
However, one needs to take note of the fact that the yuan's hefty gains against the euro could obviate a sizeable appreciation of the currency vis a vis the U.S. dollar, and that, should the euro fall somewhat more against the greenback, then so too, might the yuan.
For the moment, the Chinese currency took a nice upward leap, rising as high as 6.811 to the dollar – a leap that albeit only 0.2% in height, still represents a 21-month high. The U.S. should theoretically be happy about the Chinese announcement; however, if this is the pace and size of China’s "yuan flexibility" and "upward adjustments," it might take longer to achieve the eventual U.S. aims than it took to build the Great Wall.
Gold prices climbed on the back of the Chinese currency news, as did the majority of the commodities’ complex. Participants who entertained pulling back from last week’s record high levels rethought the strategy following the perception that a stronger yuan must imply a weaker dollar.
The idea that gold and the dollar have now decoupled and can rise together was quickly shelved in favour of the old ‘gold up / dollar down’ formula. In other words, since lately the longs will accept any excuse to keep pushing values higher towards $1280, it was as good a trading prompt as any. As a result, the overnight trading band for the yellow metal stretched as high as the $1265.30 on the spot bid side (while the lows came in near $1255).
Jon Nadler is a senior analyst at Kitco Metals Inc. North America.