LexisNexis(TM) Academic - Document
Copyright 2005 The Financial Times Limited
Financial Times (London, England)
July 22, 2005 Friday
London Edition 1
SECTION: CAPITAL MARKETS & COMMODITIES; Pg. 43
LENGTH: 653 words
HEADLINE: China tinkers and the world reacts Renminbi revaluation sparks a sell-off of US Treasuries as debt traders review their portfolios, write Richard Beales and Stephen Schurr
BYLINE: By RICHARD BEALES and STEPHEN SCHURR
BODY:
The Chinese government's decision to revalue the renminbi and peg it to a basket of currencies instead of the dollar could be a step towards reducing what Alan Greenspan, Federal Reserve chairman, on Wednesday called the "unusual behaviour" of US Treasury markets.
In the initial aftermath of China's move, the markets engaged in fairly predictable reactions. The US yield curve sold off on speculation that demand for US Treasuries from China and elsewhere may soften.
Many commentators have attributed the stubbornly low yields on Treasury bonds - especially the 10-year note - partly to buying pressures from foreign central banks, in particular those of China and Japan.
Based on that view, the sell-off in the Treasury market after the Chinese announcement is "a legitimate reaction" said Rick Klingman, head of US Treasury trading at ABN Amro.
"One result is a flight from US Treasuries into other government bond markets," said Mr Klingman. China's new approach will involve pegging the renminbi to a basket of currencies, potentially reducing its need to buy dollar-based assets such as Treasuries and boosting its purchases of euro and yen-denominated assets.
Longer-term, a more freely floating currency could also mean the Chinese central bank has less need to hold foreign securities in any currency, said Mr Klingman. That could help explain why bonds initially sold off in Europe, albeit to a lesser extent than in the US.
However, Jack Malvey, global fixed income strategist at Lehman Brothers, cautioned that the trading is based on conjecture, not reality: "Anytime a significant market event occurs, some of the instantaneous conjecture ends up being pretty off target."
China's move had immediate repercussions around the globe as investors scrambled to digest how the revaluation might alter the landscape.
Japan could feel the most immediate effects. In the short term, the revaluation provides a shot in the arm to the yen. But a substantial yen appreciation could have negative implications in the longer term for an economy reliant on exports to China and elsewhere.
"Don't forget, Japan is a bet on exports to China, and the market will focus on that in the immediate term," said Anais Faraj, a strategist at Nomura Securities.
But if the new exchange rate regime translates into a more stable path for Chinese growth, that could have a positive effect for Japan.
Despite the possibilities, Mr Faraj expects little reaction in the Japanese government bond market: "It's the last controlled market in the world."
Washington has been demanding a revaluation of the renminbi for months now, believing the Chinese currency to be overvalued. Observers said participants in markets worldwide are relieved the revaluation has finally occurred, alleviating rising tensions over trade between China and the US.
"Almost every country in the world would suffer collateral damage from trade battles between China and the US, and a defusion of protectionist sentiment in the US bodes well," said Mr Faraj.
Some argued that this was the most important effect of the revaluation in the short term. "If protectionist outcomes are on the back burner, that's a bigger impact than anything else," said Anton Pil, global head of fixed income at JPMorgan Private Bank.
Mr Pil said uncertainty remains. China has not published the breakdown of foreign currencies it intends to use in its basket, nor have authorities given details of how the daily rate-setting mechanism will work. The bond market sell-off may partly reflect this "uncertainty premium", he said.
The sell-off could be overdone for another reason, according to Lewis Alexander, chief economist at Citigroup. If the markets expect further revaluation moves by China, controlling the exchange rate could require the central bank to intervene more than in the past, he said. "In the short term, you could easily see more reserve accumulation (by foreign central banks)."
LOAD-DATE: July 21, 2005
Financial Times (London, England)
July 22, 2005 Friday
London Edition 1
SECTION: CAPITAL MARKETS & COMMODITIES; Pg. 43
LENGTH: 653 words
HEADLINE: China tinkers and the world reacts Renminbi revaluation sparks a sell-off of US Treasuries as debt traders review their portfolios, write Richard Beales and Stephen Schurr
BYLINE: By RICHARD BEALES and STEPHEN SCHURR
BODY:
The Chinese government's decision to revalue the renminbi and peg it to a basket of currencies instead of the dollar could be a step towards reducing what Alan Greenspan, Federal Reserve chairman, on Wednesday called the "unusual behaviour" of US Treasury markets.
In the initial aftermath of China's move, the markets engaged in fairly predictable reactions. The US yield curve sold off on speculation that demand for US Treasuries from China and elsewhere may soften.
Many commentators have attributed the stubbornly low yields on Treasury bonds - especially the 10-year note - partly to buying pressures from foreign central banks, in particular those of China and Japan.
Based on that view, the sell-off in the Treasury market after the Chinese announcement is "a legitimate reaction" said Rick Klingman, head of US Treasury trading at ABN Amro.
"One result is a flight from US Treasuries into other government bond markets," said Mr Klingman. China's new approach will involve pegging the renminbi to a basket of currencies, potentially reducing its need to buy dollar-based assets such as Treasuries and boosting its purchases of euro and yen-denominated assets.
Longer-term, a more freely floating currency could also mean the Chinese central bank has less need to hold foreign securities in any currency, said Mr Klingman. That could help explain why bonds initially sold off in Europe, albeit to a lesser extent than in the US.
However, Jack Malvey, global fixed income strategist at Lehman Brothers, cautioned that the trading is based on conjecture, not reality: "Anytime a significant market event occurs, some of the instantaneous conjecture ends up being pretty off target."
China's move had immediate repercussions around the globe as investors scrambled to digest how the revaluation might alter the landscape.
Japan could feel the most immediate effects. In the short term, the revaluation provides a shot in the arm to the yen. But a substantial yen appreciation could have negative implications in the longer term for an economy reliant on exports to China and elsewhere.
"Don't forget, Japan is a bet on exports to China, and the market will focus on that in the immediate term," said Anais Faraj, a strategist at Nomura Securities.
But if the new exchange rate regime translates into a more stable path for Chinese growth, that could have a positive effect for Japan.
Despite the possibilities, Mr Faraj expects little reaction in the Japanese government bond market: "It's the last controlled market in the world."
Washington has been demanding a revaluation of the renminbi for months now, believing the Chinese currency to be overvalued. Observers said participants in markets worldwide are relieved the revaluation has finally occurred, alleviating rising tensions over trade between China and the US.
"Almost every country in the world would suffer collateral damage from trade battles between China and the US, and a defusion of protectionist sentiment in the US bodes well," said Mr Faraj.
Some argued that this was the most important effect of the revaluation in the short term. "If protectionist outcomes are on the back burner, that's a bigger impact than anything else," said Anton Pil, global head of fixed income at JPMorgan Private Bank.
Mr Pil said uncertainty remains. China has not published the breakdown of foreign currencies it intends to use in its basket, nor have authorities given details of how the daily rate-setting mechanism will work. The bond market sell-off may partly reflect this "uncertainty premium", he said.
The sell-off could be overdone for another reason, according to Lewis Alexander, chief economist at Citigroup. If the markets expect further revaluation moves by China, controlling the exchange rate could require the central bank to intervene more than in the past, he said. "In the short term, you could easily see more reserve accumulation (by foreign central banks)."
LOAD-DATE: July 21, 2005
posted by Eastlaw at Saturday, July 23, 2005
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