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Dollar At One Month Lows On PBOC Advisor Comments That Chinese FX Formation Mechanism Needs "Drastic" Reform

Tyler Durden's picture




 

Appeals for changing the fixed CNY exchange mechanism are now coming not only from the office of Chuck Schmuer. In a column in China's Caixin website, Zhou Qiren, a central bank advisor, said that China's yuan exchange rate formation mechanism needs drastic reform. "The central bank has used too much money to intervene in the foreign
exchange market, so modest reform is not going to help
," said Zhou, a
member of the Monetary Policy Committee under the People's Bank of
China, in his special column on the Caixin website. "We need drastic measures," he said. Zhou said the growth of China's monetary base is largely decided by the
central bank's purchase of foreign exchanges, which in turn is fueling
inflation. The comments resulted in dollar weakness overnight as soon as they hit the wires, sending the DXY to one month lows of about 73.616, a level last seen on May 5. The statement offset some carry currency weakness overnight after the RBA decided to keep rates unchanged at  4.75% in a widely expected decision, though a hike is still thought likely in coming months to combat inflation amid a massive trade and mining boom. Additionally, courtesy of further rumormongering out of Europe, which today has been with a EUR-bullish bias, the EURUSD has continued its uptrend, and is now also trading at one month highs, appreciating by 700 pips since recent lows of under 1.40 on May 23, last printing at 1.4666. As usual, Greek newsflow will dominate the EURUSD, and thus, the general market.

From Market News:

China's yuan exchange rate formation mechanism needs drastic reform, Zhou Qiren, a central bank advisor said in comments published on Tuesday.

"The central bank has used too much money to intervene in the foreign exchange market, so modest reform is not going to help," said Zhou, a member of the Monetary Policy Committee under the People's Bank of China, in his special column on the Caixin website.

"We need drastic measures," he said.

Zhou said the growth of China's monetary base is largely decided by the central bank's purchase of foreign exchanges, which in turn is fueling inflation.

"The cost of the central bank continuing to buy U.S. dollar to maintain a steady yuan-dollar rate is too high. It's inevitable that we must reform the yuan exchange rate regime, otherwise our economy will always be in turmoil," he said.

But the central bank advisor said a major yuan reform doesn't mean there will be sharp change of yuan exchange rate.

"As long as other institutions can replace the central bank in buying U.S dollars, the yuan exchange rate level can remain unchanged," Zhou said.

Economists have suggested that the Ministry of Finance replace the central bank in purchasing foreign exchange in the interbank market.

 

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Tue, 06/07/2011 - 07:15 | 1346232 huggy_in_london
huggy_in_london's picture

The australian economy ex-mining is in recession.  You can't use monetary policy to stop your terms of trade!  Its insane policy.  I think the penny has dropped inside the RBA.  Housing cracks appearing also down there.  Guess you can run but you cannot hide.

Tue, 06/07/2011 - 07:17 | 1346237 qussl3
qussl3's picture

Whats the over under on the RBA cutting rates before raising them?

 

Tue, 06/07/2011 - 07:41 | 1346266 Hedge Jobs
Hedge Jobs's picture

The next RBA move will be down. Aussie house prices are tanking at the moment and just like everywhere else it will be property bubble busting that sends them into deep recession. Seems its not so different down under after all.

Tue, 06/07/2011 - 08:10 | 1346322 PeaBird
PeaBird's picture

The country, ex-resources/mining industry, was/is in recession before house prices started to really tank. It was credit growth into residential property & govt. props during the entire "GFC" episode, that kept Aussie house prices afloat.

That credit growth has been reversing gear for quite a few months now, more than half a year really. Hence, why we are seeing the concomitant declines in prices that are making MSM headlines recently. It's not so different, however, please get your chronology of events right.

Reality can't be boxed into nice orderly frames like "property bubble bursts" then "deep recession" happens, because that is not the case in Australia. Minus mining/resources, the country was in already recession before the declines in house prices we've seen reported by the MSM lately.

Tue, 06/07/2011 - 07:25 | 1346245 GeneMarchbanks
GeneMarchbanks's picture

You mean to say a shack in North Sydney isn't worth $600,000?

Tue, 06/07/2011 - 07:29 | 1346247 Gordon Freeman
Gordon Freeman's picture

As soon as the Great Satan breaks wind in Atlanta this afternoon, the risk trade will be back on like Donkey Kong--good for 45 SPY points tomorrow, gold well north of 1560, etc.

Tue, 06/07/2011 - 07:40 | 1346272 buzzsaw99
buzzsaw99's picture

so buy emerging markets bitchez?

Tue, 06/07/2011 - 07:55 | 1346292 equity_momo
equity_momo's picture

After you Claude.

Tue, 06/07/2011 - 08:13 | 1346330 Re-Discovery
Re-Discovery's picture

EUR will reverse soon.  A smart poster (whom I opposed at the time) made the salient "buy low, sell high" point that -- for now -- the dollar is in a trading range.  72.5 seem to be the low, and I believe it will reverse back up again at that level.  All correlated assets will also move (this includes Silver, but possibly not Gold as much.)

I am not sure how high dollar could go this time, i.e. may break the range, but likely would need Ben's next 'race to bottom' move to reverse.

Tue, 06/07/2011 - 09:36 | 1346539 steve from virginia
steve from virginia's picture

 

Hmmm ...

ZH 'management' left out the, 'from the, "Buy our Chinese- Made Shit or Else!" department' part.

Lessee, what is the daily turnover in the dollar F/X markets again? $4-5 trillion?

An someone would actually notice if the Chinese were to dump their dollars all at once? Maybe for a day.

Then the Chinese would be holding what, exactly? What would they swap the dollars for? Yen? Mexican pesos? Eeeeuros?

China's entire problem (other than being filled with Chinese) is their massive and growing hoard of dollars. The cost of managing this surplus is so gigantic it's bankrupting the entire country. China dumping the entire dollar surplus for absolutely nothing in return would be the best possible outcome for the Chinese.

They are so frantic to gain 'value' for their dollars they're wetting their pants. China uses dollars to buy raw materials, bidding the price and devaluing their precious dollars in the process. What value does China gain from the raw materials?

The materials go into the air and water poisoning the Chinese children. Dollar value is pumped into the gas tanks of the 'newly rich' Chinese where it is burned up in return for absolutely nothing.

China is caught up in the self- destructive dynamic of the waste- based USA economy. China is a version of 'all hat, no cattle'. It holds dollars the same way it would hold warehouses full of plastic dash-board Jesuses. There is no US 'output' to back those dollars only the 'promises' of Wall Street shysters.

What next? USA could 'change the currency' and create 'New Dollars' that would be swapped for older versions ... and simply give the Chinese the finger. If the Americans were to do that ... in a nice way, of course ... it would be the best gift one country could possibly give to another. It would be Chinese Independence Day. China would have no paper to bid for energy or other raw materials. Its self- destructive mercantile business 'plan' wuld be short- circuited. Its surplus capacity would vanish. China would be compelled to rebalance its 'sheet'.

After a hundred years and a thousand- hundred million deaths of 'excess' Chinese, you might wind up with a decent country over there. People could busy themselves tearing down the monuments to excess 'consumption' and salvaging materials for 'adaptive reuse'.

Not to happen, the real outcome is zero- reform leading to ... a hundred years and a thousand- million Chinese ...

 

...

Tue, 06/07/2011 - 09:45 | 1346582 HistorySquared
HistorySquared's picture

 


Using the Mundell Flemming Model to Forecast Currency Regimes


The Mundell Flemming Currency model suggests that countries can have two of the the following, but not all three :

  • A fixed exchange rate regime
  • Monetary policy independence
  • High capital mobility

When a country is pursuing all three, you can use the current trend to forecast which leg will break.

The ERM crises of 1992-1993 serves as an example. The Exchange Rate Mechanism kept European currencies within a fixed Band. There was high capital mobility and a fixed exchange rate regime. But the UK, Italy, and Spain, still maintained monetary independence, with each central bank regulating their own banks and credit. None wanted the harsh benchmarks set by Germany’s Bundesbank. With three legs all being pursued, one was bound to break. The British Pound came under attack, was forced to devalue under pressure from speculators like George Soros, and leave the ERM, while the others devalued within it.

Meanwhile, which leg is likely to break for China? Right now they are pursuing policies that increase capital mobility so they can export inflation. They will not give up monetary independence. They maintain control over their exchange rate. With capital mobility increasing exponentially, central bank authority never to be ceded, the mundell flemming model suggests the fixed currency regime will break.

the same logic could have been used to forecast either a loss of greece sovereignty over their banks, credit, and tax system or the fixed currency regime must be broken.  They may do the former, but only upon a massive principal writedown. 

 

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