One of the key talking points this week was the fact that the US Treasury issued is review of the currency market and found that while the Yuan was undervalued, China was not guilty of manipulation. The report was due out in April and was postponed ostensibly in anticipation that China was going to move shortly. It moved in June ahead of the G20 meeting. China’s competitiveness yielded rewards. Congressional leaders took exception and hearings have been promised. The Obama Administration is making a wager that this Congress will not be able to cobble together enough support to effectively overturn Treasury’s decision. However, in fairness, Treasury recognized that it is still not clear how far and how fast China will allow the yuan to adjust. It kept the door ajar as well by indicating the next review will be out in October, which coincidentally is ahead of the November election. The dollar strengthened every so slightly on the week against the yuan (CNY6.7730 from CNY6.7716 last week). The Yuan has strengthened about 0.8% since the decision to break the dollar peg. No matter how much China allows the Yuan to appreciate, it is unlikely to satisfy the critics some of whom talk about as much as a 40% misalignment. From an economic point of view, the focus on a nominal bilateral exchange rate makes little sense. Note that next week China reports a string of economic releases, including Q2 GDP, CPI, trade and new yuan loans. A picture of a slight cooling in the economy, with still firm inflation (3.3% expected in June after 3.1% in May) and a large, even if not accelerating, trade surplus.
Analysis provided by Exto Capital