Chinese Yuan Reval |

Chinese Yuan Reval

For years there has been talk of the yuan being undervalued, but no one really wanted to change the status quo: China exported goods and in the process deflation, the US exported dollars and financial engineering. The thinking was always that a currency peg would have to be readjusted at some point, but the Chinese showed great resolve that they would be able to perform it in a stable fashion.

For some odd reason, the US is now clamoring for the devaluation of the dollar against the yen. Why? Through competitive devaluation, the Fed will have a little breathing room to ease up on the quantitative easing that it can’t sustain. Of course, if the yuan does indeed appreciate, the Chinese will be buying less US debt, and interest rates will rise. I can only assume that the US government believes that this can all be done in a coordinated, smooth manner. For all its objections, the Chinese should be happy to let the yuan appreciate a little to stem local inflation, help them fight the real estate bubble in the major cities, and help make the US look like the bad guy as growth stalls.

The revaluation will happen, but as long time reader are aware, I don’t have as much faith in the ability of governments to coordinate nor predict the consequences of their actions, so I am not as optimistic. I continue to contend is that China will be sending fewer and fewer recycled dollars into Treasuries and we will be facing higher rates in the near future.

Currency markets and Treasuries continue to the markets that we’re watching closely:

http://www.marketwatch.com/story/china-leans-toward-yuan-float-2010-03-17

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