China loses ground on inflation: moves closer to yuan float

In the war against inflation China seems to be fighting a losing battle. Despite raising interest rates and the reserve requirements on banks, it is obvious to almost everyone that the Chinese are losing this battle. China has resorted to using their stockpiles of commodities to flood their domestic markets in a desperate attempt to cool the inflationary fires only to have it backfire as the impact of their move only encouraged more ravenous demand. China has been trying to dose its inflationary fires with a water pistol or even worse an accelerant as it vainly refused to face up the real problem, their manipulated currency.

That is until now. Perhaps China is getting the message that their currency manipulation is now harming their own economy. By coddling their businesses and siphoning off wealth from its neighbors, the Chinese have created one heck of an inflation problem. Fed Chairman Ben Bernanke could have told them that and did when he sternly reminded them that the emerging markets have their own policy tools to deal with inflation. So quit whining about QE 2!

The elephant in that inflationary room is and has always has been the Chinese restraint of their currency which has created monetary imbalances throughout the globe. China now seems to be acknowledging the problem. Not only are they suggesting that that their policy is increasing inflation, it appears they are getting ready to do something about it sending the Yuan Renmimbi to record highs against the dollar. China is now going to allow the trading of options on the yuan against other global currencies domestically. Starting April fool’s day the Chinese will take the first steps towards a freely traded currency which is an appropriate launch date because they have been treating the rest of the world like we are fools. The Wall Street Journal says, “The State Administration of Foreign Exchange, China's foreign exchange regulator, said in a statement Wednesday it will initially launch trading of "European-style" yuan options on the interbank market. Businesses will be allowed to buy call and put options from banks, but not to sell them unless they are squaring positions, it said. In a forex option, a buyer has the right to buy or sell a currency at a specified rate at a future date. Exposure is limited in such an arrangement because an investor isn't obliged to exercise the option. In a European-style option, investors can only exercise their rights upon the contract's expiry, in contrast to "American-style" options, which allow investors to exercise before or upon expiry.” Agreeing to float the Chinese currency would lessen the need for an extension of quantitative easing in the United States. That in turn would lead to a stronger dollar. The combination of a stronger dollar coupled with a cooling of Chinese demand for commodities would help break overheated markets and reduce inflation in China in other emerging markets.

The other big guns to worry about in the oil markets are the guns in the Middle East. Demonstrations in Libya and other counties remind us that discontent over the economic conditions in the Middle East are deplorable. Still in the oil market the risk premium seems to be lightening a little bit being helped by the pending delivery of oil from a glutted Cushing, Oklahoma delivery point. The Brent WTI spread has come in almost $2.00 from its record high, the wideness of the spread is obviously showing more Mid-East concern. North Sea production has been severely challenged by storms and winter weather. You cannot dismiss the fact that there is some safe haven buying in oil as traders look to hedge off risk from continued worries surrounding Europe’s shaky financial problems they are still emanating from Portugal, Ireland, Italy, Greece and Spain. Even OPEC’s crude basket filled with less than desirable sour crude is heading towards $99.

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 pflynn@pfgbest.com.

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

Futures and options trading involves substantial risk of loss and may not be suitable for everyone. The information presented by The PRICE Futures Group is from sources believed to be reliable and all information reported is subject to change without notice.


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