Yuan Depegging

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Market voice

Yuan de-pegging: what it means for Asia
Callum Henderson, global head of FX strategy and Thomas Harr, senior FX strategist at Standard Chartered in Singapore, predict the effects of China’s yuan de-pegging on currencies in Asia and around the globe

On Monday, June 21, China de-pegged the USD/CNY exchange rate, resuming the process of making the exchange rate more flexible, which halted in July 2008 when USD/CNY was re-pegged in response to the global credit crisis. Immediately after the de-pegging, USD/CNY showed significant volatility. On June 21, it was fixed at 6.8275 – unchanged from the previous Friday – but thereafter was allowed to trade substantially lower. On June 22, it was fixed at 6.7980, but then ramped sharply higher. The message from the Chinese authorities is clear – the focus is currency flexibility, not necessarily appreciation. Both fundamentals and realpolitik support a continued appreciation, but much will depend on short-term moves in other important exchange rates such as EUR/USD and USD/JPY, and the US dollar more generally. If the first week of greater flexibility was anything to go by, it could be a bumpy ride. We expect USD/CNY to reach 6.70 by year-end and 6.56 by July 2011. A more flexible yuan will have limited immediate impact on Asian economies, especially given our expectation for a slow and moderate appreciation against the dollar. A stronger yuan is expected to create renewed upward pressure on other Asian currencies, especially the Taiwan dollar, Singapore dollar and Malaysian ringgit. China’s import concentration in raw materials and high-tech capital goods and a stronger yuan should boost China’s demand for such products. For commodities, the expectation of robust demand from China could help support prices. The change could also affect Asia indirectly: if the market is again pricing in the yuan to appreciate moderately in the

long run, capital could return to Asia in search for yield – which could...
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