China widens the band!

Friday, May 18, 2007

To a whole 0.5% per day! When the existing 0.3% band was reached only twice since the reval! And all of this just before the SED! It's the start of a new era in foreign exchange and fixed income! Macro Man is unbelievably excited by this news!

Or, China could just be throwing Paulson a bone to head off the protectionists in Congress, and will change nothing about its behaviour.

Posted by Macro Man at 12:52 PM  


Dear MM,

When RMB is let lose , doest the FX market react with a $USD sliding ?

That doesnt seem to be happening now ?

Please could you explain if there is a correlation at all ?

btw, u are the first ones of the econ blogs to report this news. Great work.

1:59 PM  

The appropriate FX market reaction depends on what you think this move means. If, like me, you think that this move (along with moest rate hikes and another rise in the reserve requirement ratio) are largely window dressing, then the appropriate reaction is to yawn.

If you think this means that USD/RMB will cascade lower, the appropriate reaction is to sell USD against other EM Asia; if you think that SAFE will buy yen to ensure competitiveness, then sell USD/JPY.

If you think that this means that PBOC will quit intervening so much, then selling EUR/USD isn't a bad idea, as they would persumably have fewer EUR to buy on an ongoing basis to maintain benchmarks.

Interestingly, most of the flow appears to be from systematic trend followers rather than macro types; it seems as if most of my peers agree with me!

Macro Man said...
2:12 PM  

what FX market are we talking bout ? market that is choking on short $ ? this market is ill....

Anonymous said...
2:39 PM  

I don;t even know how short people are anymore. The lack of impulsiveness in any direction (other than INR, IDR, and BRL) isn't really indicative of large positioning, and the anecdotal evidence seems to indicate a paring down of $ shorts from discretionary guys. I'd concur, howeve, that the market is ill; I think most of the macro community seem to have decided that FX is a sucker's propostion when compared with equities, commodities, etc...

Macro Man said...
2:51 PM  

Ahh.. now that you mention INR..

do you think INR is on a strengthening mode ? but the country is in CA deficits isnt it ?

That doesns't too right to me ?

3:36 PM  

Yes, India has a c/a deficit...but it also has high interest rates and inflation. The RBI is now more worried about inflation than external balance, and hence is happy to use the INR as another tool to rein it in. So yeah, the prognosis for the INR is pretty good until/unless the RBI is satisfied with the inflation outlook and decides to re-enter the FX market.

Macro Man said...
3:45 PM  

This post really should come with a warning msg. The concept of sarcasm is only now starting to make its way across the pond ...


Even with a free float on the RMB, until SAFE stops throwing around stupendous amounts of money (or the macro events start stacking up even more so than now) the RMB cross could be a tough trade.


Quarrel said...
7:19 PM  

I know that chineese are called asian judes and that they are supposed to be smart, but i just don't get their logic.

They should have been buying every share of energy, mineral or agricultural company that they could get their hands on for long time already, just for a hedge to all those subsidised prices,
instead of treasuries or writing checks to blackstone...

flipper said...
8:14 AM  

Well, they have been buying petroleum and some resource companies...the new fund will presumably do more of the same. And please- there's no need for the type of descriptive language that draws on racial stereotypes.

Macro Man said...
11:07 AM  

I'm sorry didn't mean to offend anyone.

flipper said...
3:18 PM  

Respected MacroMan,

There is one question that keeps me awake at nights ..regarding CB operations.

If you see RBI, to control M3, they increase reserve ratios which sound fine.....but I don't understand their increasing of REPO and REVERSE REPO rates.

why would they increase the repo rates ? wouldn't it cost for RBI ? and how would it control money supply


Anonymous said...
2:58 AM  

Flipper, I assumed you didn't mean to offend anyone. But these issues are so sensitive these days that I think it's best not to stray anywhere near the line. (As an aside, apologies for the delay in your post. I had been playing the with some of the Blogger settings, which stalled all comments in a queue.)

TIA, I think the RBI is most concerned with inflation, and raising the repo rate is just one of the tools avilable for them to do so. The higher domestic interest rates in India are presumably one of the reasons why the RBI has steeped back from aggressive FX intervention as well.

Macro Man said...
9:44 AM  

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