Well, it's finally here -- the new and improved renminbi (in a slightly more powerful formula)!
The yen jumped sharply against a range of currencies following the announcement by the People’s Bank of China that it would revalue the renminbi, following pressure from leading industrialised countries.As expected, the Chinese sprang this move on world financial markets. On July 11, the Singapore financial newspaper The Edge reported that hot money speculating on a revision had begun leaving Asia. If true, the gamblers were caught (somewhat) unawares.
The PBOC said it would re-peg the renminbi to Rmb8.11, from Rmb8.2765, and it would adopt a currency basket for managing the currency.
The trading band in which the renminbi would be allowed to fluctuate stayed the same, at 0.3 per cent on either side of the new central level.
The revaluation is hardly large, of course -- a mere 2%, less even than the diminished expectations of US revaulation skeptics. This is a far, far cry from the 27.5% revaluation that some in the US Congress are demanding.
And also as expected, the renminbi peg has moved to a basket of currencies, although the content and weight of that basket is as yet unannounced. Thus the renminbi should rise against the dollar by more than 2% because of this move, but probably not by much.
Furthermore, the adage "as goes China, so goes Asia" has been borne out as well. The yen strengthened from around ¥113 yesterday to nearing ¥110 today, and some see the yen reaching that magic ¥100 later this year -- although with US inflation and Japanese deflation, that is hardly a sign of inordinate yen strength any longer.
The most important fallout from the renminbi revaluation is not going to be felt in international trade markets, but instead in international bond markets. As Bloomberg reports,
China's announcement spurred a sell-off in U.S. Treasury securities, amid speculation that the country will reduce its purchases. China is the second-biggest foreign holder of Treasuries, with more that $243 billion at the end of May, according to the Treasury Department. . . .As more revaluations and more basket tinkering occur in the months and years ahead, one hopes the animal spirits won't take over and drive US interests rates through the roof. Broad Asian currency revaluation now has its chance to truly pare down our gargantuan trade imbalances. Here's wishing it luck.
The yield on the benchmark 10-year Treasury note rose more than 6 basis points, or 0.06 percentage point, to 4.22 percent.