Apr 29, 2005

Renminbi Tests the Air Outside the Band

From the FT:
China's renminbi currency traded briefly outside its tightly controlled band on Friday, triggering a renewed wave of speculation that the government was set to allow a long-expected revaluation.
The People's Bank of China, the central bank, late on Friday blamed the change on "technical problems", with officials speculating a dealer may have keyed in the wrong rate.
In spite of mounting international pressure for China to allow its currency to appreciate, a spokesman for the PBoC said no announcement of a change in policy was planned.
Traders said the renminbi, which has been pegged to the US dollar for a decade, was briefly in the market at a rate of Rmb8.2700 to the dollar, outside of the usual band of 8.2760 to 8.2800.
Traders could not say whether the State Administration for Foreign Exchange, the Chinese government agency which handles currency trades, conducted any business at the higher rate.
Frank Gong, a strategist with JP Morgan in Hong Kong, said he would not be surprised to see some kind of announcement from the PBoC on currency over China's week-long May holidays, which start on Sunday.
"But the point is that they are ready to do it and could move at any time," he said. He said the higher rate remained on trading screens for up to 20 minutes, a sign that the authorities may have been testing the market "to see how much ammunition they may need to keep everything under control".

Hard for me to imagine someone not noticing the price trading outside a band thats been in place for 10 years.

* Update 11:20 AM - The FT has a second story that is more heavily weighted towards the trades being a technical glitch. It also mentions some statements in an official newspaper that "conditions for a renminbi revaluation were "ripe" thanks to reforms of the commercial banking sector and the forex market, although any widening of the existing band could be small."

FYI, Friday after the close is primetime for announcing currency band moves. The idea is that it gives the markets the weekend to figure out how to react.

* Update 1:45 PM - This story sums up a couple of banks' opinions about how and when the Chinese gov't will move the peg. I am surprised that a few are still not expecting a revaluation this year. Another story discusses this week's action in the won.

I am assuming that China will be successful in limiting any move to a small one (< 10%) but think that could still cause some pretty big trade adjustments around Asia. I expect the yen and won appreciation vs. Europe's currencies will continue.

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