Category — Asia

The Chinese government has been under a great deal of pressure recently to allow the country’s currency to appreciate.  The yuan has been on a managed flat regime since July 21, 2005, when it was first taken off its fixed dollar peg.  And since that date, the yuan has actually appreciated 9.3% against the dollar.  But that has not done much to cool China’s overheated economy.  Most market observers agree that the domestic stock market is overpriced and likely nearing the bursting point of a bubble.  China’s exports are hitting record highs bringing with them enormous trade surpluses that only exacerbate the trade inequality between the United States and China.  US lawmakers have whipped themselves into a frenzy criticizing China and its exchange rate regime (saying the yuan is undervalued).

China has tried to deal with these problems in a variety of ways.  Earlier this summer, the government raised the country’s capital gains tax, hoping to cool the stock market rush.  Just last night, the central bank raised borrowing and lending costs by 0.27%.  But market speculators suggest that in conjunction with the release of that decision, the government also sold large quantities of yuan on the open market.  And so between the announcement of the interest rate hike and the close of trading at 5:30 PM in Shanghai, the yuan actually fell 0.14% to 7.5740.

Most analysts believe the yuan is on track to gain in value, however.  Standard Chartered Plc, which does 2/3 of its business in Asia, forecasts a gain of 1.9% to 7.42 by the end of this year.  By the end of 2008, the yuan should be all the way up to 7.00 per dollar, according to bank forecasts.  But the appreciation is expected to be modest in character as the Chinese government is loath to use the currency to manage the economy.  An undervalued currency is still too important for the export-driven economy, and inflation and liquidity (while at high levels) are not at crisis points yet.  And so look for the yuan to stay undervalued with relation to the dollar for the time being.

Speaking of the US dollar, forex traders saw a consolidation of the currency after Fed Chairman Bernanke’s congressional testimony yesterday.  The greenback stemmed its losses and looks as if it has entered a period of relative stabilization.  The US dollar might even be ready to break out against the pound, euro and yen in the coming days and weeks.  For a more detailed evaluation of those and other popular currency pairs, check out DailyFX.com’s 2007 Third Quarter Forex Market Outlooks.

Bernanke spent a good deal of time on the subprime mortgage crisis, even admitting that the total losses could amount to over $100 billion.  But most of his testimony concerned the growth and inflation forecasts for the US economy in 2007.  This is in marked contrast to his predecessor as Chairman, Alan Greenspan who loathed forecasts and projections.  Bernanke’s style is formatted to a more transparent rendering of Fed decision-making, and this is good news for forex traders.  More information and more transparency mean less volatility in the currency markets.  Admittedly, a decrease in volatility is less exciting for some traders, but I would gladly sacrifice the excitement (and anxiety) for more safety and security in my investments.  Especially since, over the long run, Bernanke’s style is conducive to a more profitable investment strategy.

The Chinese economy has grown at its fastest rate in 12 years during the second quarter. China’s GDP growth has increased to 11.9 percent from a year ago. This figure has exceeded all expectations from 23 economists at Bloomberg. Inflation has risen to 4.4 percent in June, the fastest rate since September 2004. The Chinese economy is on fire and needs cooling. The most obvious is a change in monetary policy. There is much speculation the Chinese central bank will increase interest rates and in turn this will strengthen the yuan. But is revaluation by direct policy of the yuan needed?

According to Glen Maguire, chief Asia economist at Societe Generale SA, a strict revaluation by the central bank is needed in order to quell the surge. He indicates the yuan may even need to appreciate as much as 3.5 percent in a single day. A stronger yuan would slow down the economy by making exports more expensive and thereby reducing China’s enormous trade surplus. U.S. lawmakers have been very keen on a strengthened yuan, claiming that U.S. companies have been taking hits by its artificially low value. Senator Charles Grassly has spoken on the issue extensively stating the Chinese currency has not risen fast enough.

Despite U.S. and Chinese economists having met and agreeing on the same direction for the yuan, the Chinese central bank does not want a fast acceleration. Bank of China Governor Zhou Xiaochuan has stated he does not want the yuan to accelerate nearly as fast as the U.S. would prefer. Other currency analysts do not see the yuan appreciating to unprecedented levels anytime soon. According to Tim Shea, a currency analyst in the Sales and Trading Department at FXCM, “China has shown since the initial dropping of the peg in 2005 that the strengthening of the yuan would happen gradually and at their own pace.” He points out, “…that a 3 percent change in one day would be a move of 2200 pips, the equivalent of all the movement made since January. This would not be in line with past policy.”

We have also seen changes in Chinese fiscal policy to help the cooling process. Inflation has actually outpaced the return on bank deposits spurring investments in the equities market. The benchmark CSI 300 stock index for the Chinese market has gained 87 percent this year. In response, fiscal measures have included legislation allowing the 20 percent tax on interest income to be reduced or even taken away. As a result, fixed-income investments have increased to 26.7 percent in the first half of the year from a year ago. Even though this increase in savings is modest in comparison to the spurring equity run, a future meltdown of the Chinese economy is unlikely. With the right fiscal and monetary policy the Chinese economy will continue to grow at a controllable pace. The yuan will strengthen, but most likely at a pace unsuitable to U.S. lawmakers.

Commodity currencies have been beating up on the US dollar and the Japanese yen recently and yesterday was no different.  The Canadian dollar, the New Zealand dollar and the Australian dollar all hit new highs, an occurrence so common in that last couple of weeks that’s most traders simply yawned.  Some of the underlying support for these currencies comes from high commodity prices, especially oil and gold, of course.  But much of the gains should also be attributed to weakness in the US dollar and the yen carry trade.

It is pretty easy to spot the strength the commodity currencies have derived from greenback bears.  The data released in the respective countries has not been really great.  Canada’s inflation numbers yesterday printed lower than expected.  Australia and New Zealand have not released much data recently, and what has been released has been worse than expected.   But the rise of the Loonie, Aussie and Kiwi cannot be stopped.  And that can be traced back to the sluggishness of the US dollar.  And the market consensus after Fed Chairman Bernanke’s speech is that US interest rates are likely to stay the same for some time.  Bernanke also seemed more concerned about the slumping housing market than he has been in earlier speeches.  And so the commodity currencies should continue to benefit from the weak dollar.

The other factor fueling the fresh highs in this area of the forex market is the yen-based carry trade.  The interest rate advantage for Australia and New Zealand compared to Japan is enormous, and currency traders just cannot seem to get away from the high yields.  And that differential is likely to get higher as the futures market lists a 66% probability that the Reserve Bank of New Zealand will raise the country’s interest rates, already the highest in the industrialized world, at its next meeting.  Most currency analysts are pricing in another rate hike this year for the Royal Bank of Australia as well.

The appetite for risk (as well as the hunger for yield) in the market is tremendous, and the surging carry trade is reflective of that.  AUD/USD is at an 18-year high and NZD/USD is at its highest level since the currency was floated in 1985.  While the amazing rate of appreciation might be hurting the country’s exporters, the situation is only exacerbated by the weak greenback.  It is because of this phenomenon that the Canadian dollar is up 12% already this year, with the USD/CAD hitting 1.0416 this morning, its highest level since 1977.  But the latter pressure is not likely to go away anytime soon as many analysts are touting the weak US dollar as good for the American economy.

November inflation data was published yesterday above expectations.  Although lowering from above 11% earlier this year, CPI came in at 9.9% YoY.  PPI came in at 12.7%.  The most likely response from the central bank will  be to not lower the rates anytime soon.

“We will take action in advance, moderately, to avoid drastic reactions. We will adopt a forward-looking approach” states Bank of Japan Governor Fukui.

Boris Schlossberg of Forex Capital Markets says:

Those comments helped propel the yen higher as traders speculated that the central bank may be ready to raise rates before the year end. Although recent economic data from Japan has been relatively lackluster reflecting the overall global slowdown in demand, the country’s unnaturally low interest rate of only 25bp has attracted enormous amounts of carry trade flows against the currency, pushing the EUR/JPY rate above the critically important 150 level. Japanese officials cognizant of the deep discomfort on the part of their European counterparts at the lofty levels of euro against the yen have tried to jawbone the exchange rate lower. Last week Hiroshi Watanabe, Japan’s top FX official stated that there was no reason for yen to weaken further. However Mr. Watanabe’s remarks had little lasting impact on the market as traders dismissed them as mere talk. Tonight’s statement by Governor Fukui appears to be an effort by Japanese officials to finally back their words with action. Should BoJ raise rates before the year end, the yen may rally higher as carry trade liquidation takes hold in earnest.

On the technical side, the USD/JPY (dollar against the yen) is:

• Below yesterday’s low at 117.65
• Price falls into monthly pivot range (117.38 to 118.25)
• Price still below 20 day moving average (118.43)

How about on bank notes? The Kazakh Central Bank did not spell the word “bank” correctly when printing their currency on the new notes.
* Reuters Article

The United States Bureau of Engraving and Printing has made some mistakes before too, and they are valuable if you find them. Takes a look at some of them here.

The budget once again is at a surplus in the Phillipines making the first eight months of the year  all a surplus to total $2.5 billion. The government budget also reported a surplus for August making the year-to-date deficit 34.2 billion pesos compared to the 80.8 billion pesos last year.

The peso reached only 49.88 peso per United States dollar compared to June this year when the dollar bought over 53 pesos.

Manilla Standard Today Article

A military coup invaded Bangkok with tanks, and soldiers seized radio and television stations. Prime Minister Thaksin Shinawatra declared a “severe state of emergency” via Channel 9 out of New York as the rebellion called for his resignation. The Thai Baht dropped a hard 2% against the Dollar in less than 2 hours.

The chart portrayed shows the Thai Baht plotted against the US Dollar over the past three months.

CTV Article

By Yumi Kuramitsu
Aug. 29 (Bloomberg) — Singapore, a city-state with gross domestic product one 40th that of Japan, is poised to overtake Tokyo as Asia’s biggest currency trading center, fueled by investor demand for emerging-market assets.
China and India are luring funds from Japan as investors seek bigger returns in the world’s fastest-growing major economies. Restrictions on currency transactions in the two countries mean that most of the trades have to be done in offshore financial centers.
“The fastest growing sector of the foreign-exchange market is in emerging Asia, and trading for much of that is based here,” said Callum Henderson, head of currency strategy in Singapore at Standard Chartered Bank Plc, which makes two-thirds of its profit in the region. “Prospects for Asian currency volume growth still look extremely good.”
Daily volume in Singapore’s spot market, transactions for delivery in two days, averaged $65.1 billion in April, just behind the $66.1 billion traded in Tokyo, surveys sponsored by the two central banks show. Singapore trading stood at $42.5 billion two years earlier, compared with $53 billion in Tokyo, according to a survey by the Bank for International Settlements.
The volume of trading in Chinese yuan increased more than fivefold from 2001 to 2004, and trading in the Indonesian rupiah jumped 283 percent, according to the Basel, Switzerland-based BIS. Global foreign exchange trading expanded 36 percent in constant exchange-rate terms in the same period.
Investor speculation that China will allow the yuan to strengthen faster is fueling bets on the currency. The Group of Seven industrialized nations in April told China to let the yuan appreciate to narrow lopsided trade flows.

Favorable Location

Singapore’s location in Southeast Asia and its diverse population are helping it take advantage of the opportunity. English-speaking residents from China, India, Malaysia and Indonesia provide a workforce with the local knowledge and language skills to do business throughout the region.
“Japan is on the edge of Asia, so you can’t cover the other markets that well,” said Rajeev De Mello, the Singapore-based head of Asia fixed-income investment at Bank Pictet & Cie., which
has $28 billion of debt under management. “Singapore has a talent pool. They have people from everywhere here.”
De Mello, 40, chose Singapore over Hong Kong and Tokyo when he moved to Asia from Geneva in December. The city-state offered benefits for his wife and three children, including the quality of housing and the choice of international schools, he said.
“We saw a `black and white’ colonial house for the first time,” he said, referring to the traditional homes built by Singapore’s British rulers in the 19th century. “It was like, `Wow! I have to live in one of these.”’

Luring Money Managers

Singapore is also offering incentives to attract hedge funds and other money managers as it seeks to expand the financial industry to spur economic growth. Fund managers with at least S$5 billion ($3.2 billion) of assets don’t have to pay taxes on the fees they earn.
The number of hedge funds in the city grew by 51 percent to 109 last year, and assets tripled from a year earlier to more than $10 billion, according to the Monetary Authority of Singapore.
While Singapore may soon become Asia’s biggest currency center, Tokyo isn’t going to fade away.
The growth of Japan’s economy after three recessions in the past 16 years will lead to an increase in currency trading in Tokyo, said Tetsuya Inoue, deputy director general of financial
markets at the Bank of Japan. The current expansion will become the longest since World War II by November, surpassing the so-called Izanagi boom of 1965 to 1970, a 57-month period of growth named after an ancient god.

Financial Regulations

“With the economic recovery, not only corporations but also investors, including retail investors, are increasingly active in foreign exchange,” Inoue said. “We have seen foreign banks
returning to Tokyo as a result.”
Singapore still may attract more investors because its financial regulations are less cumbersome than Japan’s. The corporate tax rate in Japan is 40.7 percent, the highest in Asia
and more than double Singapore’s 20 percent rate, according to an annual survey by accounting firm KPMG LLP.
“Fund managers have cited Singapore’s central location in Asia, transparent tax and clear regulatory regimes as important factors,” said Ong Chong Tee, deputy managing director in charge of monetary policy at the Monetary Authority of Singapore. “All the top private banks already have a presence here.”
Toshio Aoki, chief executive officer of fund management company Stat Arb Ltd., started trading in Singapore two years ago. To buy gold and Nikkei stock exchange futures in Tokyo, a company is required to set up two separate entities, each with its own license, capital and employees, Aoki said. In Singapore, when a company’s capital is below a certain amount, it just needs to register.
“The biggest reason I opened up in Singapore rather than Tokyo is the regulations,” said Aoki, who declined to disclose how much his firm manages. “It’s just very difficult to meet the
requirements in Japan.”

–With reporting by Hiroko Komiya in Tokyo, Jake Lee in Hong Kong
and Wes Goodman in Singapore. Editors: Grose-Hodge (wsm)

To contact the reporter on this story:
Yumi Kuramitsu in Hong Kong at (852) 2977-6623 or
ykuramitsu@bloomberg.net;

To contact the editor responsible for this story:
Tony Barrett at (86) (10) 6505-9786 or
tbarrett4@bloomberg.net.

EUR/JPY pushes up 160 pips since Friday morning (100 pips this morning) to 149.73, making a new all-time high. Most currencies rallied against the dollar, but the Bank of Japan said it will move slowly before hiking rates again. This along with rising oil costs keep the Yen down.