US continues to pressure China

At this week’s World Economic Forum, which is being held in Davos, Switzerland, China has predictably held center stage. Not all of the attention has been positive, however, as the US has used the Forum as an opportunity to lambaste China for its stubborn to further revalue its currency. Since last July, the Yuan has appreciated 2.5%, which is much less than what Western policymakers had hoped for. While senior US

Canadian Election Drives Canadian Dollar

In a national election held earlier this week, Canada’s Conservative movement, led by Stephen Harper, emerged as the winning party. Harper’s victory, according to many currency analysts, represents the best outcome, as Canada can now move past the corruption scandal which plagued the previous administration. The new administration may also implement certain structural reforms, so as to make Canada’s economy less dependent on natural resource exports. Meanwhile, Canada’s stock market continues to set records, and Canada’s Central Bank is moving to stem the interest rate differential between Canada and the rest of the developed world. CBC News reports:

“A Conservative majority is expected to generate a positive short-term reaction for the dollar, as some policy concerns will be partially alleviated.”

Read More: Markets, dollar set record on forecast of Tory win

A case against Yuan revaluation

On paper, the case for a revaluation of the Chinese Yuan seems rock solid: China’s forex reserves have swollen to $800 Billion, its annual trade surplus exceeds $100 Billion, and its exports have soared. However, delve deeper into the figures, and a vastly different picture emerges. First, the country’s forex reserves are largely the result of ‘hot money,’ inflows of foreign capital hoping to instantaneously capitalize on a Yuan revaluation, rather than long term investment in capital projects. In addition, China’s trade surplus is increasingly a story of slowing imports, rather than growing exports. As investment in fixed capacity has

OTC Yuan trading system takes shape

Last year, over $300 Billion in currencies were traded via China’s foreign exchange market. 98% of this trade, however, involved China’s official interbank market, in which buyers and sellers are matched up in a centralized system. This will soon change, however, as China prepares to open the new market, in which currency trading will be facilitated by 13 banks, including five that are foreign. The Central Bank will continue

Correction: China may not diversify reserves

Last week, officials from China’s Central Bank announced that they would “actively explore more effective ways to utilize [forex] reserve assets.” Many analysts interpreted this remark as an explicit signal that China would begin ‘diversifying’ its foreign exchange reserves, by holding fewer USD and more of other currencies. However, as the speculation began to reach fever pitch, the same group of officials announced

Canadian Loonie faces new challenges in 2006

In the last three years, the Canadian Dollar has appreciated over 35% against the USD! Most of those gains, however, took place in 2003 and 2004, as the Loonie only appreciated 3.5% in 2005. Accordingly, many currency strategists believe 2006 will be a flat year for the Canadian currency, due to declining commodity prices and a stagnant economy. In fact, recent economic data suggest that these two variables are closely related, as Canada relies heavily on commodity exports to drive its economy. Nonetheless, 2006 should witness hikes in Canadian interest rates, which could draw inflows of foreign capital. In short, there are competing forces tugging at the Loonie, which could conceivably be pulled in either direction. CBC Business News reports:

The central bank has raised its trend-setting overnight interest rate three times in recent months, to 3.25 per cent, to keep inflation from taking off. Analysts have said the bank could push the key rate as high as four per cent in 2006.

Read More: Canadian dollar falls more than full U.S. cent as commodity prices slip

Change in Yuan trading rules may spur appreciation

Earlier this week, the Bank of China issued permits to several foreign and domestic banks, which enable them to serve as market-makers for the Chinese Yuan. Yesterday, the Bank of China further explained the new system, stating that the Yuan’s daily opening price would be calculated based on an average of spot rates offered by 13 market-makers. While the Bank of China, through its forex reserves, could still

China begins OTC Trading in Yuan

In a move that is sure to turn a few heads, China will soon allow over-the-counter trading in its Yuan currency. In addition, several domestic banks and a few foreign banks have been awarded market-maker status in the new system, which legally enables them to buy and sell Yuan to market participants. Previously, only large financial institutions were permitted to trade the Yuan, via the interbank market. While the Yuan