The Renminbi (CNY) Jumps to 19-Year High against the Greenback (USD)

on Oct 12, 2012

China’s renminbi jumped to its highest level against the US dollar in almost two decades, the Financial Times reported on 12 October 2012. The unexpected appreciation frustrated many investors who had been betting on the opposite movement given the observed slowdown in China’s economy.

**China’s Currency Closes at 6.2672 against the US Dollar**
The renminbi, which is the official name of the Chinese yuan, showed unexpected strength, almost hitting the upper limit of its daily trading band versus the greenback. On October 12, the yuan closed at 6.2672 against the dollar, climbing by 0.16 percent from the previous day and near the top of the one percent range in which it is allowed to deviate from a daily fixing set by the central bank.

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The yuan had been trading at or near its strongest level against the dollar since the 2005 currency revaluation. China’s currency was last this high 19 years ago.
“This is something that has been quite remarkable,” commented Louis Kuijs, an economist with the Royal Bank of Scotland (LON:RBS), as quoted by the FT. “The PBoC [People’s Bank of China] has surprised the markets but the appreciation is in line with the observation that policy makers don’t seem to be as concerned about the slowdown as some people in the markets and some corporates.”

**Analysts Baffled by Yuan’s Appreciation**
And while some people in the markets were probably quite frustrated by the yuan’s unexpected appreciation, analysts have presented different explanations why China’s central bank has allowed the currency to strengthen given the country’s slowed growth rate.
!m[](/uploads/story/570/thumbs/pic1_inline.png)Some analysts seem to think that it is the very concerns about China’s economy that are at the root of the currency appreciation. “At times of turmoil, China’s government thinks that stability is best, and that also means stability in exchange rates,” notes Mr Kuijs, as quoted by the FT. “The appreciation now seems to be a quite bold step and almost suggests some sense of confidence with what’s going on.”

Others attribute the yuan’s upward movement against the dollar to the upcoming presidential elections in the US. The FT quotes Dariusz Kowalczyk, a strategist with Credit Agricole CIB, as saying that it would be in China’s interest to see president Barak Obama re-elected, given Mitt Romney’s tougher stance on China. “Thus, the PBoC may be trying to help Obama to make the argument in the next debate that he has succeeded to pressure Beijing into appreciating [the renminbi].”

Bloomberg notes that speculation that the Chinese government will step up measures to counter a slowdown also contributed to the yuan’s appreciation.
**Singapore Refrains from Monetary Stimulus**
Meanwhile, other Asian currencies also advanced after Singapore unexpectedly kept its bias for currency gains. Bloomberg reported on October 12 that in its bi-annual policy review, the Monetary Authority of Singapore indicated it would maintain a modest and gradual appreciation in its currency to contain inflation.
The Singapore dollar advanced 0.5 percent against its US counterpart, whereas Malaysia’s ringgit appreciated 0.3 percent. Taiwan’s dollar and South Korea’s won each rose 0.3 percent against the dollar, whereas Indonesia’s rupiah climbed 0.1. The Asia Dollar Index, which tracks Asia’s 10 most- active currencies outside Japan, advanced 0.3 percent.


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