While a change in the Chinese forex regime was
long overdue, its timing nevertheless took many by
surprise. The Chinese are masters in wrongfooting the
market and this was no different this time around. The
Chinese currency regime was altered significantly,
with a 2.1% revaluation versus the USD. On top of
that, the yuan will no longer be linked to the US currency
but rather to a basket of currencies with a 0.3%
margin of fluctuation .In this note we put the decision
in its economic context and elaborate on its effects on
the forex and fixed income markets.
* Chinese revalues its currency and builds in more flexibility
* This a first step for a more balanced world economy, but much more is needed
* In a first reaction, Asian currencies gained versus USD, while US bonds lost ground
* In the short run, the FX and FI movements may be overdone as Chinese hope to have
bought time before any next step
* However, in the long term, speculation will return to the fore
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