Jan 26, 2005

Renminbi and Yen

I am impressed that the currency market made an about face off of yesterday's big move in the dollar Yen. I tend to agree that the market's indecision on China is at the root of it.

The markets seem to be making their bets on a Chinese revaluation through the medium of the yen. According to Ashraf Laidi, chief currency analyst at MG Financial Group, “A revaluation in the renminbi would mean Asian nations could allow their currencies to appreciate against the dollar while offsetting any negative impact on their competitiveness through a decline against the rising renminbi. Therefore, a delay in a renminbi revaluation will have the opposite effect and pressure the Asian currencies including the Japanese yen.”
I am not sure if I agree with the idea that holding the Chinese peg pushes the Yen lower. Japan still holds an aweful lot of U.S. debt and with the U.S. funding needs I just don't see the market letting the Yen drop. The technical picture agrees with this.

Click on the Chart to see a larger image!!
Posted by Hello

This weekly chart looks like a pennant formation which will tend to break with the prevailing trend. A trade above yesterday's high (maybe to 105.10) would violate the pattern and lead to a quick leg of dollar strength. Some of you might be interested to look at a daily chart and see that this pennant will be down to a very narrow range (if it holds) by the time the Chinese New Year arrives.

**added 6:30 PM** There is now a second article discussing the currency swings.

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