Forex Investment and Currency Trading

The PBoC’s Monetary Policy Report was released earlier today. The report indicated that the central bank will “improve the yuan exchange rate mechanism” moving forward based on capital flows and fluctuations in the major currencies. This apparently establishes a new set of criteria for determining how and when the CNY will move. At the very least, this suggests that the authorities are becoming more sensitive to the concerns that many countries are having with regard to domestic currency appreciation versus the CNY; as the USD falls and the CNY has operated under a de facto peg over the past year, the AUD has seen a 40% gain versus the Chinese currency while the EUR has appreciated by some 20% and the CAD has gained 16%, for example. Only the MXN among the major currencies has fallen against the CNY in the past 12 months. If the authorities are preparing to allow the CNY appreciation to restart – even gradually – we would expect to see some obvious movement in the NDFs in the next few weeks. Recall that President Obama is visiting Asia later this week and China’s apparent, new found sensitivity the CNY’s broader trade weighted value will help deflect some criticism at least that is levelled at the current FX regime. The GBP has been choppy overnight, with the currency rising initially on better than expected unemployment data then falling in response to the BoE Inflation Report; the report outlined a sharper recovery overall but highlighted significant risks still around projections. Gov. King’s comments on the beneficial impact of a weaker GBP and remark that policy makers were “open minded” on the need for additional stimulus weighed on sterling.