Last updated: July 28, 2006 7:01 pm

Yen profits amid renminbi revalutaion hints

The yen reversed two months of weakness to chalk up gains across the board this week as speculators scrambled to cut short positions amid signs that China may be preparing to ease its iron grip on the renminbi.

The yen is viewed as the most liquid proxy for the Chinese currency, in the belief that a stronger renminbi could presage wider Asian forex strength.

While the market has become accustomed to Chinese economists calling for Beijing to let the renminbi strengthen at a faster pace, even hardened traders raised an eyebrow when Wen Jiabao, the prime minister, pledged “gradually” to increase exchange rate flex­ibility, just two days after Hu Jintao, the president, sounded the alarm over China’s growing trade surplus.

“These quotes are remarkable. The key policymakers have never pointed to the trade balance as a structural problem area,” said Thomas Stolper, global markets
economist at Goldman Sachs.

The external pressure on Beijing also rose a notch when Charles Schumer and Lindsey Graham, two US senators, said they would press forward with their bill to put a 27.5 per cent tariff on Chinese exports to the US if the renminbi was not “significantly” revalued by September 30.

Few in the market believe the Schumer-Graham bill will reach the statute book. Nevertheless, the renminbi rose 0.2 per cent to Rmb7.9705 to the dollar this week, its highest level since last July’s 2.1 per cent revaluation, with the Bank of New York reporting that the People’s Bank of China was “notably absent” from the market in the last two days of the week.

The yen joined in the party by rising 1.1 per cent to Y114.78 to the dollar,
0.9 per cent to Y146.28 to the euro and 0.9 per cent to Y213.89 against sterling.

The yen’s rise was lubricated by the realisation that short-term speculative traders had built up near-record short-yen positions during the previous week, leaving plenty of scope for the yen to rise on position squaring.

“The yen’s rise was prim­arily down to positioning,” said Chris Turner, head of currency research at ING Financial Markets. He said short-term funds had “bet the ranch” on short-yen positions, only to be unnerved by the noises from Beijing.

The US dollar endured a weak week, with a soft gross domestic product reading on Friday capping a run of data that saw the futures markets cut the probability of an August rate rise to 30 per cent.

The dollar fell 0.3 per cent to $1.2747 to the euro, 0.3 per cent to $1.8641 against sterling and 1.8 per cent to a two-month low of $0.7659 to the Australian dollar, which rose after strong inflation data, notably a surge in banana prices, raised the prospect of two more rate rises this year.

High-yielding currencies in general did well, led by the Turkish lira, 4 per cent better at TL1.49 to the dollar, and the South African rand, 2.2 per cent better at R6.8753 to the dollar.

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