China renminbi revaluation to have limited FX impact

Regional currencies enjoyed a boost after China said it would allow the renminbi to appreciate. But this rally is unlikely to last, with traders noting that global FX markets remain volatile and that the renminbi’s value may rise only a minimal amount in the coming year.

  • 22 Jun 2010
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Asian currencies were buoyed by the renminbi revaluations but the rally is set to be short-lived, say traders.

Regional equities and currencies lifted yesterday (June 21) after the People’s Bank of China announced on Saturday [June 17] that it would end the renminbi’s currency peg to the US dollar, which has stood for close to two years.

The renminbi rose by 0.4% to Rmb6.7976 to the US dollar yesterday after the announcement, according to Bloomberg. Asian currencies rose in tandem, with the Malaysian ringgit and the South Korea won key beneficiaries.

The ringgit advanced by 2.1% to RM3.1855 to the greenback, while the won rose by 2.6% to W1,171 against the US dollar, the increase of both outpacing the respective 0.8% increases in the New Taiwan dollar and the Singapore dollar.

But this rally in Asian currencies may be short-lived, says Mitul Kotecha, head of global FX strategy at Crédit Agricole CIB in Hong Kong.

“Asian currencies have been recovering fairly strongly in the last week, even aside from yesterday move, so we may move into a consolidation phase right now. China’s announcement has accelerated the appreciation but I think as well, some of the euphoria has been overdone,” he said.

Kotecha believes that the Korean won will trade between a narrow range of W1,160 to W1,200 against the US dollar in coming weeks. It traded at W1,182 at 11am in Hong Kong today (June 22).

Similarly, the Malaysian ringgit, which traded at RM3.202, should struggle to break below the April low of RM3.1825, he notes.

“These two currencies would be key beneficiaries of a Chinese revaluation but a lot of that move is once off, an immediate knee-jerk reaction,” said Kotecha. “You have to bear in mind that a lot of Asian currencies are still very susceptible to risk aversion and what’s happen in Europe. It’s not going to be clear cut.”

The euphoria around the renminbi is also set to wane, as observers say traders are moving cautiously. The one year non-deliverable forward on the renminbi points to Rmb6.65, a 2.6% move from current levels. This is a slight increase from the Rmb6.72 that was priced in on June 16, prior to the announcement.

“There’s bit more appreciation priced in but it’s not a great deal more,” added Kotecha. “It partly reflects the fact that the market is moving gradually, and doesn’t expect a dramatic appreciation from current levels. That comes from China’s clear message that it wants to move gradually.”

  • 22 Jun 2010

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