Yuan revaluation also yen bullish

As forex traders are well aware, the People’s Bank of China dropped its decade long-peg to the U.S. dollar on July 21 (see “Detecting the professionals’ footprints: Lessons of the Chinese revaluation” and “China abandons yuan peg,” Currency Trader, August 2005). While the unexpected timing of the news sparked a knee-jerk bullish reaction in the yen that day, the strength was short-lived as traders began to understand the limits of the adjustment. The roughly two percent revaluation was ultimately interpreted as a symbolic political gesture in the face of increasing pressure from the U.S. and other countries.

“It supported the yen for about 30 seconds,” Rogers says of the initial news in late July. However, “a lot of people still think the Chinese will do another reval in November,” he adds.

While the initial two-percent revaluation won’t really make an impact on global trade flows or economic growth, analysts say it is significant in that it signals the first of perhaps many additional appreciation moves over the next several years. Technically, the Chinese have pegged the yuan to a basket of currencies, with a 0.3-percent daily trading band with the dollar. But, since late July, not much movement has been seen in the yuan against the dollar.

Analysts say the fall period could be ripe for another move by the Chinese. The U.S. Treasury’s biannual report is due out in mid-October and that could be a key date to watch, analysts say.

“Politics between the U.S. and China will come to the forefront as Congress will probably push for greater revaluation,” says Fink, pointing to the October time period. “I think we will see appreciation of the Asian currencies during September and October.”