China Abnormally Lax On Its Currency Peg As Yuan Flexibility Soars

Traders are speculating that China could be testing the waters for a move on its yuan-dollar peg given that the yuan was allowed to fluctuate by an abnormally wide range all of a sudden:

China Daily:

[Yesterday] The yuan gained 0.1 per cent to 6.8264 per dollar in Shanghai, the biggest gain since February 2009, according to the China Foreign Exchange Trade System. That’s the third fluctuation of 0.05 per cent or more in four trading days. Local financial markets were closed last week for the Lunar New Year holiday.

“It is an obvious signal that the People’s Bank of China (PBOC) may allow the yuan to appreciate in the first half of this year,” said Zhou Mingjian, an analyst with Pacific Securities.

Yi Gang, head of State Administration of Foreign Exchange and vice governor of the PBOC, said the government’s attempt to control asset bubbles and maintain healthy economic development this year faces threats from increased foreign exchange inflows. He said the near-zero interest rates of central banks in Western economies, such as the US, have stoked cross-border speculative flows.

Avoiding further hot money flows betting on yuan appreciation into China is of course an extremely difficult game. China may hike the yuan, but if markets believe it’s a sign of more to come then a badly communicated yuan hike could stimulate even further speculation, betting on even further yuan appreciation.

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