Chinese will re-commit to the US dollar exchange rate

Foreign Exchange - Currency Outlook

Everybody and his brother is calling for the Chinese to revalue, from the Philippines and Malaysia to the eurozone, US, IMF and World Bank. APEC finance ministers have so far resisted making the same call, but the summit isn’t over yet. The APEC chairman, Singapore FinMin Tharman Shanmugaratnam, said "From today's discussion, none of us were calling for, or thought it advisable, to have any sudden significant re-alignment of exchange rates." Asked about Chinese revaluation, he said "It's not a silver bullet for solving either the question of domestic demand or towards achieving balanced and sustainable growth."

Is everyone counting on Obama to pull the rabbit out of the hat?

Market News reports today that the Chinese say he won’t. The report says "China has no plans to allow the yuan to appreciate in the short term because the economy is still recovering from last year's global financial crisis, a source familiar with discussions among monetary policymakers told Market News International Thursday. The source said that the government expects to receive a message from President Barack Obama about the need for greater exchange rate flexibility during his visit here next week. Obama will be making his first official visit to China November 15 to 18. His visit will include talks with President Hu Jintao and Premier Wen Jiabao. 'China will not see Obama's requirement for more exchange rate flexibility as a key consideration,' the source said."

Well, of course the Chinese would not tip their hand ahead of time if they do plan to deliver Obama a big victory. And if they do deliver such a victory, what is the cost? The Chinese would not be giving it away for free. Another unnamed official told Market News that "China's exports are more important than U.S. deficits. The Chinese government will not ask for any specific U.S. announcement about an exit strategy but will simply mention it." This is the usual ploy of changing the subject to avoid talking about the elephant in the living room. Or maybe the Chinese will re-commit to the US dollar exchange rate and promise to stop talking about SDR's in return for keeping the US dollar peg a little longer.

Nobody knows what the outcome will be, but clearly something is afoot. Uncertainty about the size of the something is US dollar rate -favorable all by itself since it raises the idea of tectonic shift in sentiment and real flows. But we must not allow expectations to get too high. Summits hardly ever result in a big change. One of the few exceptions was the US TreasSec hounding China at G7 on revaluation a few years ago - and it worked, albeit not right away. The next two or three days will require nimble foreign exchange trading trading with close - in stops and a willingness to be open-minded. Adopt the Boy Scout motto and "be prepared."

Pounds to US Dollars = 1.6579
Pounds to Euros = 1.1071
Euro to Pounds = 0.8949
Pounds to Australian Dollars = 1.7968

Bye For Now

Barbara Rockefeller
Foreign Exchange Trading
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