China to transform currency policy

Currency markets are heavily reacting today to news from China about their much debated currency policy. A week before G20 leaders next meet, China has signaled that it will be moving away from its strategy of keeping the Yuan pegged to the Dollar that has been in operation since July 2008.

Pound Sterling – UK Markets

China’s suggested policy shift alongside rising house asking prices in the UK has led the Pound to gain on the US Dollar hitting the highest level in nearly five weeks. Yesterday the Chancellor forewarned that budget cuts will affect everyone from all walks of life. Whilst cuts and tax rises will be severe, council tax is expected to be frozen to soften the blow for households although this is not welcomed by councils already under pressure. The spending cuts are also expected to be treated with an amount of hostility by business leaders, charities and unions. As the emergency budget tomorrow may bring volatility, it is advisable to speak with your broker today about any upcoming transfers.

US Dollar – US Markets

The Dollar has fallen to a four week low against the Euro as China signaled that it will end its policy of having the Yuan pegged to the Dollar. Although the US currency has weakened against fourteen of its most traded counterparts, the move by China is a welcome long term move as this will aid US exports and help them to narrow their trade deficit. Tomorrow is a significant day for US data releases that could cause movement. Releases will cover house prices, home sales, manufacturing and consumer confidence.

Euro – European Markets

The Euro has experienced volatility and some gains against the Dollar and the Pound overnight but is starting to drop against both so far this morning. On a quiet day for European data, the Euro is responding to broader market themes today such as the suggested Yuan changes. Tomorrow sees the release of data by the European Central Bank such as current account releases and consumer confidence figures.

Other Currencies – Highlights

The Chinese Yuan has risen the most in twenty months against the Dollar. The Chinese policy of having the Yuan pegged to the Dollar was adopted during the start of the global crisis to protect Chinese exporters. The likely abandonment of this policy will be seen as the first step towards driving the world economy into sustainable expansion and should help balance trade deficits in other nations and reduce global imbalances. Apart from having an immediate effect on the Yuan, gains were also triggered in high yielding currencies such as the Australian and New Zealand Dollars.