Asian FX Rates

There may be much back-slapping over the fact that Asian-Pacific finance ministers have endorsed market-oriented exchange rates, consistent with the op-ed piece in today's Wall Street Journal by the US Treasury Secretary and the finance ministers from Indonesia and Singapore. But actions will speak louder than words and there is much precedent for lofty platitudes to be followed up with little action. Mostly thunder, little rain. A survey of the currency regimes in a number of East Asian countries reflect a reluctance to embrace market driven foreign exchange rates. Managed regimes are the rule not the exception. Although APEC seemed to largely sidestep the issue about the Chinese yuan peg, there is speculation that China is signaling a change in its stance.

Recall that after allowing the yuan to appreciate for the three year stretch from July 2005 through July 2008, it has essentially been re-pegged to the dollar. In the PBOC's quarterly monetary report posted this week was a commitment to improve the management of the exchange rate by taking into account changes in major foreign currencies not just the dollar. This sounds like a return to the basket approach which it had opaquely said it used previously. At the same time, the PBOC dropped the official mantra that it desired to keep the yuan "basically stable at a reasonable and balanced level." The indicative pricing of the 12-month CNY non-deliverable forwards have been trending higher, suggesting larger anticipated appreciation, now about 3.3%. The timing of this would seem to steal some of U.S. President Obama's thunder from his trip to China, where he said he would raise the currency issue. Although yesterday's slew of economic data was constructive, neither inflation nor exports improved as much as the market expected and it is clear that Chinese officials still regard their fiscal and monetary driven recovery as fragile, as do other APEC and G20 members for the most part. It does not appear that significant yuan appreciation is a likely near-term scenario.