Jack Lew’s Worst Nightmare – China’s Currency Should Be 20% ‘Weaker’

The constant chant from Washington over the past few years has been one of falling just short of labeling China “a currency manipulator” and proclaiming unilaterally that the Yuan is being artificially maintained at a lower level than it should be. However, as Bloomberg Briefs’ Fielding Chen notes, based on a trade-weighted basket, China’s currency is actually 20% over-valued. Having stayed close in value to this basket until 2007, China’s policy since has been a stronger-than-market currency, but as the world increasingly de-dollarizes, and the Yuan gains more global prominence, the following chart suggests the direction of the next trend in China’s currency.

 

 

As Bloomberg notes,

The yuan has been drifting away from a trade-weighted currency basket since the 2008 global financial crisis. Chinese authorities’ political preference for comparative strength in trend versus key trade-partner currencies is apparent in the yuan’s performance against a basket modeled by Bloomberg Economics.

 

 

Following a currency basket in the wake of the 2008 crisis would have forced the yuan to depreciate against the dollar. This would have been politically unacceptable for China’s main trading partners and would have risked turmoil in global markets. As a result, policy makers halted ties to the currency basket, and the yuan rose.

 

Now approaching its fair value, China’s currency may move in either direction. The diminishing one-way pressure for the yuan to appreciate makes a case for Chinese policy makers to revisit the currency basket.

 

 

As China’s yuan gains global prominence, its relationship to a currency basket becomes increasingly important. From the perspective of the yuan’s marketization, the basket is a key pillar for a managed floating currency regime. For investors, the basket may also predict the yuan’s moves. Thus a representative currency basket is likely to play a bigger role in both policy makers’ and analysts’ future determinations.




via Zero Hedge http://ift.tt/1uUkeMH Tyler Durden

Leave a Reply

Your email address will not be published. Required fields are marked *