Workshops
Chris Lori & Steve Winiarski, CTA's
Sydney, AUS
July 23-25
Chris
Lori, CTA
Singapore
Aug 27-29
Inquire: www.chrislori.com
The People's Bank of China
announcement that the yuan will be de-pegged from the US dollar has
supported risk assets at the start of the week. In our weekly Sunday
evening (North America) Live Pro Traders Club, I had stated that there
was effectively not change in what the market already expected out of
China, so the "eurphoria" would be short lived once the market came to
terms with the fact that there would be uncertainty over the timing of
the Yuan movement. I had also suggested that altough DJIA futures were
100+ higher during Asia and Europe sessions, US equities would likely
open higher followed by a sell-off, which is exactly what happened. It's
imoprtant to note investor sentiment has been bolstered by the
reduction of tensions between America and China over currency policy,
and by the accompanying bullish statement from China's authorities that
the 'upturn of the Chinese economy has become more solid with the
enhanced economic stability'. As a result, the currencies of those
economies with the largest share of exports to China - Australia, Japan,
Taiwan, Korea, Brazil and Indonesia -had initially benefited. I suspect
that we may have even achieved a near term top in risk currencies and
to look for some downside from here. Moreover, as the People's Bank of
China now will have to buy fewer dollars, somewhat slower reserve
accumulation will lead to slower accumulation of US Treasuries.
Are there any lessons from the July 21, 2005 policy change? Then,
the initial reaction in currency markets proved short-lived after China
revalued the renminbi by 2.1% against the dollar and moved to a crawling
peg. But as the Federal Reserve was raising interest rates at the time,
the dollar quickly resumed its strengthening trend. In 2010 currency
market participants should be similarly aware of over-reacting. The news
does not signal that China will allow a major revaluation of the
renminbi. The maximum permitted daily range will remain +/-0.5% and
China's statement specifically mentions that no basis exists for a
large-scale appreciation of the currency. So while China will allow its
currency to resume strengthening again, the macroeconomic impact on
global trade and capital flows as well as on inflation rates will be
limited. Thus the long term reaction of exchange rates should be
marginal too. So chill out market and come to your senses. I anticipate
weakness in risk currencies following yesterdays highs.
The year end target for USDCNY remains 6.55. In the major currency
markets the core concern about euro underperformance remains unchanged.
Thus, we maintain our bearish EURUSD forecast of 1.15 by end-2010. What
China's news does do is reinforce our view that commodity currencies
will continue to do well in 2010 as the global economy recovers, but not
without some material risk averse events that could take push them much
lower. We noted AUDUSD resistance at .8850 area for some weeks and anticipate it will hold. A sustained move above .8800 will sideline us until a reversal pattern emerges.
Chris Lori
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