Traders wiped out the prospect of a near-term appreciation in the renminbi on Wednesday as the eurozone sovereign debt crisis continued to dominate direction on the world’s financial markets.
In the forwards markets, traders have now moved to predicting a fall in the renminbi against the dollar.
The Chinese authorities have effectively pegged the renminbi against the dollar since July 2008 in an attempt to protect its exporters from the effects of the financial crisis.
This has caused friction with its trading partners, especially the US, that China has enjoyed an unfair trade advantage.
Until recently, most analysts were predicting that Beijing would abandon the renminbi’s de facto peg against the dollar and allow its currency to appreciate, however.
This was not just because of external pressure on Bejiing, which has maintained its abhorrence of outside interference on its currency policy, but also because it would help to alleviate rampant inflationary pressure in the Chinese economy.
But the slide in the euro prompted by the eurozone’s debt problems has pushed the renminbi up to an eight-year high against the single currency, damaging Chinese exporters’ competitiveness.
Neil Mellor at Bank of New York Mellon said the recent slide in the euro might have persuaded the Chinese authorities that now was not the time for a change in currency policy.
“That is what is behind the move in the forwards market,” he said. “Exporters are China’s main concern and the authorities are not going to put them in jeopardy.”
In the one-month forwards market, the renminbi stood at Rmb6.8360 against the dollar, implying the renminbi would depreciate by 0.12 per cent against the US currency in one month’s time. This was the first time in five months that the one-month forward price has implied depreciation in the renminbi.
Meanwhile, in the benchmark one-year forwards market, investors slashed the expectations of 12-month renminbi appreciation from 3 per cent to just 0.6 per cent.
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