Yuan Policy Change Returns Focus to Currency Basket, Bank of America Says
China’s decision to scrap the yuan’s fixed exchange rate puts the focus back on the composition of its currency basket, according to Bank of America-Merrill Lynch.
The People’s Bank of China two days ago said it’s abandoning the 6.83 yuan peg to the dollar adopted during the global crisis to protect exporters. The central bank said while there’s no basis for “large scale” moves in the currency, the exchange rate will be allowed increased “flexibility.”
“China signals an exit from its crisis regime, but without a big bang,” a team of analysts including T.J. Bond, a Hong Kong-based economist, wrote in a note to clients today. “The key change, in our view, is the increased emphasis on a basket of currencies. This implies more day-to-day volatility in the key dollar-renminbi exchange rate, a shift which has long been a core element of our renminbi view.”
The yuan climbed 0.4 percent to 6.8015 per dollar as of 1:45 p.m. in Shanghai, according to the China Foreign Exchange Trading System.
The analysts, who also include Singapore-based currency strategist Christy Tan, Hong Kong-based economist Ting Lu, and Hong Kong-based researcher Xiaojia Zhi, said they did not expect the yuan to strengthen significantly against the greenback.
“The renminbi could even depreciate against the dollar if the euro declines.” they wrote. “Gradual moves will be tolerated, similar to post 2005 revaluation when dollar-renminbi merely fell 0.6 percent in the six-month period to end 2005. Our end-2010 forecast remains unchanged at 6.80 versus the dollar, not far from current levels.”
China’s currency is likely to see stronger gains on a trade-weighted basis, they wrote.
“Our foreign-exchange forecasts imply that the nominal effective exchange rate could appreciate some 6 percent by end- 2010, and 12 percent by end-2011.”
China’s decision is likely to prove positive for Asian currencies such as South Korea’s won and Malaysia’s ringgit, and may cause a decline in the central bank’s reserves, which could lead to reduced purchases of U.S. Treasuries, the analysts wrote.
To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net.
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