New Chinese currency policy lifts markets

By JAGDEV SINGH SIDHU
jagdev@thestar.com.my

Equities, currencies and commodities react positively to unpegging proposal

KUALA LUMPUR: Stock markets, currencies and commodities were given a boost after China signalled the end of its yuan peg to the US dollar.

Markets in Asia posted strong gains led by China, Hong Kong and Japan as investors took positions that a stronger yuan would lead to stronger consumption and demand within China and help drive exports of its major trading partners.

People’s Bank of China over the weekend said it was abandoning its peg to the US dollar, a move taken to shelter the China economy during the recent global crisis, and was reinstituting a managed float it first detailed in July 2005.

The bank said that while there was no large movement in the yuan, the exchange rate would be allowed increased flexibility.

“The yuan flexibility is bullish for a number of Asian currencies,” said CIMB Invesment Bank’s regional rates/FX strategist Suresh Kumar Ramanathan, who expects the ringgit to gradually appreciate against the dollar to RM3.05 by the end of the year.

The yuan moved to 6.79 against the dollar from 6.83 following the revaluation of the currency, its highest level in 18 months.

It was revalued to 8.11 to the dollar in July 2005 and gradually appreciated to 6.81 before it was pegged at around that level to protect its exporters and the economy during the crisis in 2008.

That statement was the catalyst for a spike in Asian stock markets and currencies, all of which posted healthy gains on the back of the stronger yuan.

“We expect equity markets to take the news positively in the short term, boding well for regional risk appetite,” Nomura said in a note yesterday. “However, the implied forward rates of appreciation will likely continue to be overshadowed by global growth concerns and ongoing jitters over European credit markets.”

The ringgit strengthened to RM3.18 to the dollar with the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) closing up 1.34% to 1335.29.

The ringgit’s jump, sparked by the move in the yuan, was also beefed up by short-covering and stop-loss calls by traders who were long on the dollar.

The breaching of the RM3.24 level against the greenback was attributed to the buying of the ringgit.

Economists felt that the benefit to Malaysia’s economy would depend on just how the yuan moves from here on and an appreciation over time would, nonetheless, be positive for the economy and Malaysian exporters.

Affin Investment Bank chief economist Alan Tan said a stronger Chinese currency would boost consumption and domestic demand but there were risks associated with that if the currency appreciated too fast.

“They cannot risk a strong currency as it could hurt exports. They remain dependent on exports,” he said.
The FBM KLCI extended its winning run to 10 straight trading days with investors buying a plethora of stocks from small-caps to heavyweight stocks in active trade.

Dividend yielding blue chips, such as DiGi.com Bhd and Public Bank Bhd, attracted buying interest along with automakers as investors reacted to the yuan revaluation.

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