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Paulson's victory: China's yuan has been cornered
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Like it or not, China has no choice other than to let the yuan appreciate against the dollar.
The combination of the world's fastest economic growth, the highest inflation rate in 11 years and the rising cost of intervention will force gains in the yuan to accelerate, even as policy makers in Beijing resist calls from the West to let the currency appreciate at a faster pace.
Central bankers in Thailand, Malaysia, Singapore and the Philippines are in the same situation, making their currencies attractive, according to money managers at the firms and Merrill Lynch & Co. Nine of the 10 best-performing currencies against the dollar in 2008 will come from Asia.Several Asian central banks see more rapid exchange- rate appreciation as an important tool to fight inflation.
After rising 7 percent last year, the yuan has appreciated 1.9 percent to 7.1623 per dollar so far in 2008. New York-based JPMorgan Chase & Co., the world's ninth-biggest currency trader, predicts a further 14 percent increase, while Citigroup Inc. in New York, the third-largest, forecasts a 6 percent advance.
Thailand's baht has climbed 3.7 percent to 32.53 this year, while the Taiwan dollar is up 2.4 percent to NT$31.75. The yuan rose 0.3 percent today, the most in six weeks, and the Singapore dollar gained as much as 0.2 percent to S$1.4107, its highest in more than a decade.
Inflation Battle
While the International Monetary Fund expects growth in Asian emerging markets will slow to 8.6 percent in 2008 from 9.6 percent last year, that's still six times faster than the 1.5 percent expansion predicted for the U.S.
Consumer prices in the region's 10 largest economies outside Japan are rising at an average annual rate of 5.30 percent, compared with 4.10 percent in the U.S., data compiled by Bloomberg show. Faster inflation raises the odds that central banks in Asia will increase interest rates, bolstering the appeal of their currencies. Asia is in relatively better shape than the rest of the world.
Costly Option
To keep their currencies from appreciating too fast and hurting exporters, Asian central banks have bought U.S. dollars, accumulating $4 trillion in foreign-exchange reserves.
The downside to intervention is that it increases the supply of the local currency, which tends to fuel inflation. To prevent that from happening, Asian central banks typically sell bonds to remove those funds from the economy.
That option has become more costly because interest on the debt is paid with income from its reserves, which are invested in dollar-denominated securities. The People's Bank of China pays 1.31 percentage points more on its six-month bills than it earns on similar-maturity Treasuries following the U.S. Federal Reserve's five rate cuts since September. Six months ago, the spread was 2.2 percentage points in favor of U.S. debt.
Intervention Burden
After four years of profits, the bank is now losing $4 billion a month by intervening, according to BNP Paribas SA, France's largest bank. Nine central banks in Asia lost a combined $160 billion in the year started July 2006.
The average benchmark interest rate in Asia is 3.60 percent, weighted by gross domestic product, according to JPMorgan estimates. That's higher than the 3.02 percent average for the Group of Seven nations for the first time in three years.
A global economic slowdown will encourage Asian central banks to keep intervening because letting their currencies appreciate too fast would make their exports less competitive.
The Bank of Korea will put a quarterly quota on won bond sales after losing more than $1 billion intervening in 2007. South Korea's reserves fell in January for the first time in seven months.
Such actions are encouraging to Pimco's Toloui, who said his funds increased holdings of Asian currencies, favoring the ringgit and the Singapore dollar. The firm is the world's biggest investor in emerging-market bonds and foreign exchange. New York-based Merrill Lynch, the largest U.S. brokerage, recommended the two currencies in a Feb. 13 report.
I'm very much bullish on Asian currencies.As the Fed cuts rates, then the costs increase for emerging-market central banks. There's less incentive for them to intervene.
For countries with high current account deficits such as Turkey, I can not say I am long on YTL.I am short of it and I believe we are in a turmoil to see who is strong enough to weather the storm and who is not.
For the week, I expect to stock market to rebound specially by bank shares and big pharma.I suggest to sell some retail sector shares, too much priced in short time for retail sector. |
| Tarih
: 18.02.2008 |
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© 2006 Mert TOKER All Rights Reserved. |
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