Is The Chinese Currency Rise Much Ado About Nothing?

From Bloomberg:

World Stocks, U.S. Futures Climb as China Ends Yuan Dollar Peg

Stocks advanced for a 10th day, sending the MSCI World Index to its longest rally in 11 months, oil and copper soared and Treasuries plunged after China signaled it will relax the yuan’s fixed rate to the dollar.

Futures on the Standard & Poor’s 500 Index rose 1.3 percent and the Stoxx Europe 600 Index climbed to the highest point since May 13 at 8:38 a.m. in New York. The MSCI Asia Pacific Index jumped 2.5 percent, the most in more than two weeks. Oil exceeded $78 a barrel, copper gained more than 3 percent and gold reached a record in New York. The Korean won strengthened as the yen and dollar fell against most major currencies, while the 10-year Treasury yield surged 7 basis points.

The People’s Bank of China said it will end a two-year currency peg adopted during the global financial crisis to protect exporters, a sign policy makers expect the world economy to strengthen. China, the world’s largest copper consumer and second-biggest user of oil after the U.S., signaled the change before the G-20 summit in Toronto on June 26 to 27.

“It’s a vote of confidence in Asia and in risk appetite and a reduction in the dangers of a trade war,” said Sean Callow, a currency strategist at Westpac Banking Corp. in Sydney. “The currencies of Asian nations, which are close competitors with China on the trade front, should do well.”

Gains in Asia were led by the Shanghai Stock Exchange Composite Index, which surged 2.9 percent. Toyota Motor Co., the world’s biggest automaker, rose 1.7 in Tokyo while Mitsubishi Corp. jumped 6.6 percent. Posco, South Korea’s biggest steelmaker, rallied 5.9 percent in Seoul.

BHP, Rio Tinto

In Europe, all 19 industry groups in the Stoxx 600 advanced. Basic-resources shares led the rally, as BHP Billiton Ltd., the world’s biggest mining company, gained 4.2 percent and Rio Tinto Group surged 4.5 percent in London. Daimler AG led automakers higher, climbing 3 percent in Frankfurt. Akzo Nobel NV rallied 1.7 percent in Amsterdam after agreeing to sell its National Starch business to Corn Products International Inc.

BP Plc led declining shares, falling 3.8 percent after saying the cost of its response to the Gulf of Mexico oil spill, the worst in U.S. history, has accelerated to reach $2 billion.

The surge in U.S. futures indicated the S&P 500 may rise for a third day. Corn Products Inc. climbed 0.9 percent in German trading. Goldman Sachs Group Inc. rose 0.8 percent in pre-market U.S. trading as people with direct knowledge of the matter said the U.S. Securities and Exchange Commission agreed to give the lender more time to file a response to the agency’s April 16 fraud lawsuit.


It will be interesting to see if this mini-rally sticks.

The timing of this announcement by the Chinese less than a week before the G20 meeting is rather suspicious, in my view.

The totalitarian state is the only large economy to keep its currency pegged to another, rather than float on the open market. 

This begs the question, why? 

Would a floating yuan appreciate as many have asserted?
Or would it grind down and devalue?

With huge trade imbalances globally, and with China and the US in particular, I suspect this announcement has more to do with political posturing than a real change in policy. 

The flash crash revealed much, in my view.  What I mean is there is a great deal of "air" that the market is riding on.

A stock market that can lose 1000 points in minutes, a Canadian dollar that can lose 6 cents within days, and commodities that fluctuate wildly, and a Baltic Dry Index that is down 1000 points year to date make me skeptical of this rally.  It is becoming more difficult to determine what the value of any stock or commodity is in this environment.

For me, I will stick with gold.