Chinese Yuan may mimic rate differentials

While interest rate differentials have been closely linked to relative values of the USD, Euro, and Japanese Yen, most people never figured the hot topic would ever be applied to the Chinese Yuan. After all, few international investors seriously care about interest rates in China, right? One economist, however, has established a strong relationship between the China-US interest rate differential and the value of the Chinese Yuan. Specifically, he figures that the Yuan’s annual appreciation will equal or come close to equaling the difference in American and Chinese interest rate levels. His reasoning is that those who invest in Chinese assets require a return equal to the yield on comparable US investments. Since American interest rates are currently 3.3% above Chinese interest rates, he theorizes that the Yuan will appreciate 3.3% this year to make up the difference. The Wall Street Journal reports:

The bottom line is that China’s Central Bank must carefully watch inflation and interest rates in the U.S. when formulating its own exchange-rate-based monetary policy.

Read More: The Yuan and the Greenback

Inflation concerns buoys USD

The last few months have witnessed a spate of bad news surrounding the USD. First, quarterly GDP data indicated the US might already have entered a period of recession, due in part to a slowing housing market. Then, the Federal Reserve Bank announced that it was halting its interest rate hikes, after raising rates 17 consecutive times. Today, monthly inflation data

Global economy might be hurt by US

For many decades, it was an accepted truth that the fate of the global economy depended largely on the state of the US economy. Over the last few years, however, this link has gradually eroded and many economists now believe the global economy can expand even when the US is in recession. As it becomes more apparent that the US economy is peaking, this belief will soon be put to the test. US housing data, which is closely followed by economists because of the

Commentary: Carry trade comes to an end

One of the most popular trading techniques used by forex traders is known as the carry trade. The goal of the carry trade is to find two countries with vastly different interest rates, and profit by buying the currency of one and selling the currency of the other. This trade is popular precisely because it is safe and somewhat predictable. By borrowing in denominations of the lower-yielding currency and lending in denominations of the higher-yielding currency, a savvy investor can capture a spread equal to the interest rate differential, as long as the values of the currencies themselves do not change. Towards this end, most of the talk in forex markets over the last year has focused around interest rate differentials.

Commentary: Carry trade comes to an end

One of the most popular trading techniques used by forex traders is known as the carry trade. The goal of the carry trade is to find two countries with vastly different interest rates, and profit by buying the currency of one and selling the currency of the other. This trade is popular precisely because it is safe and somewhat predictable. By borrowing in denominations of the lower-yielding currency and lending in denominations of the higher-yielding currency, a savvy investor can capture a spread equal to the interest rate differential, as long as the values of the currencies themselves do not change. Towards this end, most of the talk in forex markets over the last year has focused around interest rate differentials.

RMB trading becomes more volatile

Charting the value of the Chinese Yuan (RMB) against the USD reveals the currency is appreciating at a snail’s pace. When you add volatility to the chart, the story becomes less black-and-white. Over the last six months, the RMB has begun to test the limits of the .3% daily trading band imposed on it by China’s Central Bank. Now, the currency routinely gains or loses .2% in a single day. While the gains have largely been offset

CPI validates Bernanke

Last week, Ben Bernanke, Chairman of America’s Federal Reserve Bank, announced that rates would be left unchanged due to slowing economic growth. USD bulls cringed at the possibility that the Fed was done finished hiking rates. Unfortunately for them, Mr. Bernanke’s assessment was born out by CPI data, released today, which revealed growth in prices is indeed slowing. In fact, the monthly change in inflation was only .2%, the smallest increase in almost half a year. Yields on US debt instruments, including Treasury securities, fell across the board- bad news for traders who are hoping foreigners will continue to finance the US trade deficit. Bloomberg News reports:

The Fed is now done raising rates and will be cutting them next year, said Andrew Balls, a global strategist at Pacific Investment Management Co.

Read More: U.S. Economy: Slowing Inflation Validates Bernanke

Commentary: USD driven by rate differentials

Over the past 6 months, the Euro and Pound Sterling have risen steadily in value against the USD. Labor and market reforms are forcing European companies to become more competitive. Hence, the economies of Britain and the EU are finally beginning to show signs of life. While economic fundamentals have certainly contributed to currency appreciation, they must take a back seat to interest rate differentials in any analysis of currency markets. Economists reason that interest rate differentials represent a leading indicator for

Commentary: USD driven by rate differentials

Over the past 6 months, the Euro and Pound Sterling have risen steadily in value against the USD. Labor and market reforms are forcing European companies to become more competitive. Hence, the economies of Britain and the EU are finally beginning to show signs of life. While economic fundamentals have certainly contributed to currency appreciation, they must take a back seat to interest rate differentials in any analysis of

Interest rates rise in Europe

The two most important Central Banks in Europe independently raised interest rates today. The European Central Bank (ECB) was first to announce a rate hike, in a move that was widely predicted by investors. The Central Bank of UK, however, caught most investors completely off guard when it announced a rate hike of its own. It appears to be a coincidence that both banks raised rates on the same day, as the economic policies of the UK and of Europe are not entirely related. The news made USD bulls nervous on two fronts: first, the narrowing of interest rate differentials means it is more attractive to move capital to Europe. Second, and less obvious, is the implication that growth is picking up in Europe, at the very moment it is slowing down in the US. The Financial Times reports:

Jean-Claude Trichet, ECB president… said that if the eurozone economy performed as the bank expected, “a progressive withdrawal of monetary accommodation will be warranted”.

Read More: ECB and UK join drive to raise rates

Canadian Dollar continues sell-off

Since peaking at the end of May, the Canadian Dollar has declined by almost 4% against the USD. Will the Loonie recover and continue to move towards parity with the USD, as many analysts predicted, or will it move further towards a more stable long term value? Despite soaring commodity prices, the Canadian economy is not growing as fast as many economists had projected. As a result, the Central Bank of Canada is unlikely to raise interest rates at its next meeting, which means the interest rate differential between the US and Canada will probably continue to widen, and the Canadian Dollar will continue to sell-off. Bloomberg News reports:

One analyst opined, “Market players are eager to test the Canadian dollar weakness…the Canadian dollar will almost certainly fall back into favor later this year, but not before sustaining further losses.”

Read More: Canada’s Dollar Pares Gains After Economy Fails to Grow in May

Commentary: Chinese Yuan remains undervalued

With my first commentary piece, I would like to address several issues concerning the Chinese Yuan. Let me begin by saying there is a tremendous amount of information and a wide array of often-conflicting opinions surrounding the Chinese Yuan. The problem with most financial analysts is that they often fail to grasp the big picture: in this case, the determinants of the Chinese Yuan’s value are multifarious, and take in financial, economic, and political factors, which most analysts fail to consider.

Commentary: Chinese Yuan remains undervalued

With my first commentary piece, I would like to address several issues concerning the Chinese Yuan. Let me begin by saying there is a tremendous amount of information and a wide array of often-conflicting opinions surrounding the Chinese Yuan. The problem with most financial analysts is that they often fail to grasp the big picture: in this case, the determinants of the Chinese Yuan’s value are multifarious, and take in financial, economic, and political factors, which most analysts fail to consider.

Commentary: Chinese Yuan remains undervalued

With my first commentary piece, I would like to address several issues concerning the Chinese Yuan. Let me begin by saying there is a tremendous amount of information and a wide array of often-conflicting opinions surrounding the Chinese Yuan. The problem with most financial analysts is that they often fail to grasp the big picture: in this case, the determinants of the Chinese Yuan’s value are multifarious, and take in financial, economic, and political factors, which most analysts fail to consider.