China

Speculation that China may move on its currency this weekend will likely prove for naught. Nevertheless yuan non-delivered forwards continue to rise today and indicative pricing for the 12-month NDF is for a 3.6% appreciation, the most in several weeks. Many observers, including the media risk exaggerating that Nov 11 report by the central bank that said that global capital flows and changes in major currencies would be taken into account in setting foreign exchange policy and did not repeat the standard mantra emphasizing stability. However, this might not be the signal of a change in policy. Two days before the report was posted, PBOC Governor Zhou said the yuan was not under much pressure to appreciate. And the day after the report was released, Premier Wen did not mention currency policy in a speech and the last time he seemed to address it he called for stability (at a reasonable and balanced level). The economic reports this week showed deflationary pressures easing, though not quite as fast as economists expected, and exports improved, though not as fast as expected. It does also not seem part of China's modus operandi--to appear to capitulate to US, European and IMF pressure. With Obama's visit at hand and European officials next in line to visit, now does not seem to be a particularly likely time to expect a shift on the currency. At the same time, China has indicated it will expand the trials of liberalizing fx rules for individuals and allowing non-financial institutions to offer the service. This in turn has driven the Chinese dollar-denominated B shares sharply higher.

Reports indicate that the B shares trade on an average of almost half of the A shares (yuan denominated). Speculation of the renewed yuan appreciation also helps support the dollar-denominated share prices. Many suspect that if China were in fact to allow the yuan to appreciate, there would be a broad-based move against the dollar, especially through the region and that may be adding to the upward pressure on those currencies in recent days.