Forex Investment and Currency Trading

Beijing has changed course: goodbye tightening, hello stimulus. Today, the People’s Bank of China (PBoC) cut lending rates by 27bps, but kept deposit rates stable. The central bank also cut the reserve requirement for all but the five largest banks by 100ppts to 16.5%. It goes without saying that this came as a big surprise.
The move is likely triggered by rising concerns about China equities and the macro-economy in general. The timing likely has something to do with the Asian equity market sell-off today, on the back of the Lehman collapse and fears of more financial contagion in the US. [...]

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Following last week’s move of SBV to widen the dong trading band  to +/-1% but prohibiting banks from using third party currency, the onshore interbank FX Market was temporarily frozen.
However, over the last week : 1) SBV re-peged the official rate 0.4% weaker and combined with the widening of the band, the official ceiling USDVND is now 1.4% weaker at 16,848; and, 2) market thinks  SBV did provide USD to banks, though not yet enough to restore the FX market in equilibrium.  Nonetheless with the combination of these two measures, market thinks the USDVND ceiling rate is now only about 1% away [...]

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Hawkish BoT comments in the past week suggest the central bank is now ready to raise interest rates on July 16. However, near-term concerns will likely overwhelm shifting rate expectations, extending baht weakness into 3Q08. The USD/THB forecast is raised to 33.50 for 3Q08 from 31.50. Political risk would see an upward skew to this forecast in the coming months.
Inflation could reach double digits in 3Q08
Comments by BoT officials in the past week suggest the Central Bank is now close to raising interest rates. The next installment of the quarterly Inflation Report in late July will likely contain another sharp upward adjustment, [...]

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USD-CNY
Spot had a central parity fixing of 6.9372 vs. Friday’s close of 6.9420. In May, the Chinese yuan (CNY) gained 0.66% against the USD, faster than the 0.35% appreciation in April, but much slower than the 4.2% appreciation in Q1. Market participants were concerned in April and May that the Chinese authorities may have changed their FX policy substantially, no longer favouring a strong currency. However, the current view is that this was not the case; that the authorities may well have changed, but rather in favour of a strong currency on a trade-weighted basis rather than just against the USD. [...]

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