Neal Kimberley
5 Apr, 2022
Renminbi
bulls often focus on the US dollar-Chinese yuan exchange rate, but in
the current circumstances, they would do well to look further afield.
Greener pastures may perhaps be found in other yuan pairings such as
against the euro or the Japanese yen.
Stephen Jen, chief executive of London-based Eurizon SLJ Capital, made the point last week that at present, China, the euro zone and the United States, three economic giants, each face a different economic predicament. Japan, too, is confronted with a singular challenge.
Western economies may have concluded that the coronavirus is something that has to be lived with, but China begs to differ, at least for now. The phased lockdown in Shanghai is just the latest example of Beijing’s continuing zero-tolerance attitude towards Covid-19.
Lockdowns invariably come with negative economic consequences that necessitate supportive fiscal and monetary policy responses to cushion their impact on the general population and business. China is no different and the People’s Bank of China has already made targeted monetary policy interventions and has room to do more if required.
Accommodative PBOC monetary policy in turn helps support Chinese government bond prices. Given that consumer price inflation in China remains subdued, despite higher factory gate prices, such bonds continue to offer positive real inflation-adjusted yuan-denominated returns.
Meanwhile, a stable-to-strong yuan offers China some protection against presently elevated US dollar-denominated commodity prices.
Currency investors should keep in mind that China, the euro area and the United States, three economic giants, each face a different economic predicament.
Additionally, with Russia’s invasion of Ukraine having prompted Western economies to sanction Moscow – including freezing Central Bank of Russia assets that were within legal reach – the process of yuan internationalisation, and in particular its greater adoption as a reserve currency by central banks worldwide, may gain fresh pace.
Indeed, last Thursday, Brazil’s central bank, which held no reserves in yuan before 2018, said it had more than quadrupled its renminbi exposure last year and that China’s currency now represented 4.99 per cent of its reserves, up from 1.21 per cent at the end of 2020.
The Biden administration has announced plans to release millions of barrels from the Strategic Petroleum Reserve in an attempt to drive down US petrol prices, while the US Federal Reserve began tightening monetary policy last month, achieving lift-off from the zero bound with a 0.25 percentage point increase.
Higher nominal US interest rates could prove supportive for the dollar in general on foreign exchanges but if investors are looking to purchase greenbacks, their gaze may fall on euro-dollar and yen-dollar pairings rather than the dollar-yuan exchange rate.
That could potentially leave room for the yuan to make gains versus both the euro and the yen.
The European Central Bank’s own benchmark interest rate remains in negative territory. The ECB will be concerned about the inflationary threat but equally mindful that the rupture in the European Union’s economic relations with Russia, which will persist regardless of the outcome of events in Ukraine, could prove a drag on euro-zone growth.
As for Japan, it continues its quest to generate inflation. The Bank of Japan is resolutely sticking to its ultra-accommodative monetary policy which, with the Fed in hiking mode, would seem consistent with a degree of yen weakness.
All things considered, yuan bulls who generally focus on its value versus the dollar may well conclude that the euro-yuan and yen-yuan exchange rates currently offer better grazing.
Stephen Jen, chief executive of London-based Eurizon SLJ Capital, made the point last week that at present, China, the euro zone and the United States, three economic giants, each face a different economic predicament. Japan, too, is confronted with a singular challenge.
Western economies may have concluded that the coronavirus is something that has to be lived with, but China begs to differ, at least for now. The phased lockdown in Shanghai is just the latest example of Beijing’s continuing zero-tolerance attitude towards Covid-19.
Lockdowns invariably come with negative economic consequences that necessitate supportive fiscal and monetary policy responses to cushion their impact on the general population and business. China is no different and the People’s Bank of China has already made targeted monetary policy interventions and has room to do more if required.
Accommodative PBOC monetary policy in turn helps support Chinese government bond prices. Given that consumer price inflation in China remains subdued, despite higher factory gate prices, such bonds continue to offer positive real inflation-adjusted yuan-denominated returns.
Meanwhile, a stable-to-strong yuan offers China some protection against presently elevated US dollar-denominated commodity prices.
Currency investors should keep in mind that China, the euro area and the United States, three economic giants, each face a different economic predicament.
Additionally, with Russia’s invasion of Ukraine having prompted Western economies to sanction Moscow – including freezing Central Bank of Russia assets that were within legal reach – the process of yuan internationalisation, and in particular its greater adoption as a reserve currency by central banks worldwide, may gain fresh pace.
Indeed, last Thursday, Brazil’s central bank, which held no reserves in yuan before 2018, said it had more than quadrupled its renminbi exposure last year and that China’s currency now represented 4.99 per cent of its reserves, up from 1.21 per cent at the end of 2020.
While the US dollar remains far and away
the largest exposure in Brazil’s currency reserves, at 80.34 per cent at
the end of 2021, down from 86.03 per cent in 2020, it is the yuan’s
upward trajectory that is arguably more significant.
But while China is preoccupied with taming Covid-19, the United States is heavily engaged in efforts to lower inflation.
But while China is preoccupied with taming Covid-19, the United States is heavily engaged in efforts to lower inflation.
The Biden administration has announced plans to release millions of barrels from the Strategic Petroleum Reserve in an attempt to drive down US petrol prices, while the US Federal Reserve began tightening monetary policy last month, achieving lift-off from the zero bound with a 0.25 percentage point increase.
Friday’s robust US employment data may now tempt the Fed to follow up with a 0.5 percentage point rise in May. A
succession of further US rate rises should be expected but with
headline inflation at 7.9 per cent year on year in February, investors
will have to wait before they get paid a positive real
inflation-adjusted return on their US Treasury holdings.
Higher nominal US interest rates could prove supportive for the dollar in general on foreign exchanges but if investors are looking to purchase greenbacks, their gaze may fall on euro-dollar and yen-dollar pairings rather than the dollar-yuan exchange rate.
That could potentially leave room for the yuan to make gains versus both the euro and the yen.
At
least nominal benchmark interest rates are rising in the United States.
That’s not yet the case in the euro zone even as inflation jumped to
7.5 per cent year on year in March, with the war in Ukraine and the
resultant sanctions on Russia driving energy prices significantly
higher.
The European Central Bank’s own benchmark interest rate remains in negative territory. The ECB will be concerned about the inflationary threat but equally mindful that the rupture in the European Union’s economic relations with Russia, which will persist regardless of the outcome of events in Ukraine, could prove a drag on euro-zone growth.
At the very least, investors might be tempted to avoid the euro until the situation becomes clearer.
As for Japan, it continues its quest to generate inflation. The Bank of Japan is resolutely sticking to its ultra-accommodative monetary policy which, with the Fed in hiking mode, would seem consistent with a degree of yen weakness.
All things considered, yuan bulls who generally focus on its value versus the dollar may well conclude that the euro-yuan and yen-yuan exchange rates currently offer better grazing.
Neal Kimberley is a commentator on macroeconomics and financial markets