Forex report: Yuan exuberance quieted

The revaluation of the Chinese yuan appears to have come in with a bang and certainly its impact is limping out with a whimper. Investors are now concerned by the velocity of the movement ahead for the yuan and today expressed such concern by returning to old habits of buying dollars. While the daily yuan fix rose from last week’s 6.83 to 6.7980 per dollar, investors are now worried that the Peoples Bank might not approve of a more significant appreciation nor a continuous creeping move higher for its currency. After yesterday’s initial jubilation it feels like the currency market is back in the starters’ blocks.

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U.S. Dollar – After the initial euphoria of the move from the central bank in Beijing, dealers are growing wary that the yuan’s appreciation won’t be too large. Reuters news reports suggest several large state-owned banks were busy buying sizeable dollar amounts today, which would suggest that the free-market drive to today’s fixing might have gone too far. The yuan edged back towards 6.81 as investors’ appetite for yuan cooled. And as it does it appears that heads are once again being put back into the sand with the return of the prevalence of a core theme of budget deficits and bank solvency. The dollar index rose to 86.14 this morning.

Euro – On Monday the euro reached a three-week high and despite a positive business sentiment reading today out of Germany’s IFO institute, headwinds are hampering its progress. Despite the strongest reading for two years in the IFO data, investors always seem to focus on certain slivers of evidence that detract from the headlines. Within today’s report the expectations element was below forecast and seems to be unsettling the demand for euros. The unit reached a low at $1.2265 earlier after a downgrade for French banking giant BNP Paribas by Fitch ratings agency. On Monday S&P also raised its prediction of losses for the Spanish banking system unsettling investors.

Aussie dollar – After its strong performance on Monday, the Aussie has recoiled as those core fears return over Europe’s banking system and what impact possible future bank failures might have on global growth. Today the Aussie is lower at 87.52 U.S. cents compared with Monday’s high at 88.59 cents.

Canadian dollar – Inflation data released earlier in Ottawa was mildly pleasing with the headline annual CPI falling from 1.8% to 1.4% in May. The Bank of Canada’s core CPI nudged down from 1.9% to 1.8% on account of weakness in the cost of both clothing and gasoline. The central bank meets in about one month’s time to decide on any monetary policy changes. The Canadian dollar yesterday reached 98.57 U.S. cents on growth optimism fuelled by China’s move, while today it gave back an entire cent of that move and currently stands at 97.80 cents.

Japanese yen –The yen rose as investors responded to words from ECB member Christian Noyer who observed that several European banks were facing funding pressures. As a safe haven investors bought the yen driving it higher to ¥90.66 against the dollar, while against the euro it gained by one yen to ¥111.08. The yen was also a victim on Monday of exuberance surrounding the yuan news and so some rethink on that front has left dealers cold.

British pound – Chancellor George Osbourne makes his first budget speech to Parliament today and is expected to deliver £85 billion in spending cuts equivalent to 5.7% of GDP. Recent optimism that the fiscal state issue is being addressed head-on by the newly formed government has underpinned demand for the British pound recently while today appetite is dulled since investors are concerned that severe measures will crimp growth prospects ahead. With that being said there is also the concern that a stringent fiscal policy will render monetary policy useless leaving the pound weaker. However, Britain is in good company with its parlous fiscal health. The pound today slipped ahead of the budget speech to $1.4720.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC

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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