Overview: Turmoil after renminbi report

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Currency markets were thrown into turmoil on Wednesday by a report that China would allow a revaluation of the renminbi for the first time in a decade.

The online edition of the Communist Party-owned People’s Daily newspaper jolted the markets by reporting an appreciation of the renminbi would be allowed through an widening of the narrow band in which it is allowed to trade against the dollar.

There was enough detail in the initial reports to spook traders. opt cut It the move would come after a meeting next week between a “US financial minister” and an official from the Chinese central bank. opt cut ends It said there were estimates that the reninmbi would be revalued by 1.26 per cent in one month and 6.03 per cent in one year. The Chinese currency has been pegged at about 8.28 per dollar since 1995.

The yen jumped against the dollar and euro in reaction in hectic trading. However, the report later appeared to be a red herring.

China’s central bank, the People’s Bank of China, said the report, a translation of a weekend news story, was wrong. It added mistakes had been made in the translation. The dollar subsequently rallied back and was further boosted by better-than-expected US trade data.

The episode heightened speculation over whether and when China would eventually revalue its currency, leaving traders nervous.

Niels From, currency analyst at Dankse Bank, said the turmoil left markets not much wiser on the timing of a Chinese revaluation.

“While we still see an above 50 per cent possibility of it only happening in 2006, one nees to be cynical about the timing,” he said.

Mr From said the knee-jerk reaction to a revaluation would be a strengthening of Asian currencies versus the dollar, an increase in the euro against the US currency and a firming of both US and euro yields.

“A Chinese revaluation will reduce the need for China for buying US dollars for keeping the peg. This means less capital inflow to the US and less purchases of US treasuries,” he said, although adding the initial revaluation was likely to be small and upward pressure would remain on the renminbi. opt cut ends

The other main event of the day for markets was the US trade data which defied expectations of a widening deficit. The trade deficit shrank in March to $55bn, the narrowest level in half a year and the biggest monthly fall since December 2001.

However, US equity markets remained in a bearish mood. By midsession, the Dow Jones Industrial Average declined 0.5 per cent to 10,225.10, while the S&P 500 index eased 0.3 per cent to 1,162.35. The Nasdaq Composite index retreated 0.6 per cent to 1,952.05.

The falls came despite an easing of oil prices after the release of data showing US inventories of crude had risen to their highest level since July 1999.

Elliot Spar, market strategist at Ryan Beck, said the equity selling was mainly driven by technical factors. He said the US market had failed to break through the 1180 resistance level on the S&P 500 - the 50-day moving average for the share barometer - and was due for a period of consolidation.

The rumours of hedge fund difficulties that weighed on markets on Tuesday were less intense yesterday but still lurking in the background. They were one factor in a firming of US treasuries amid a general shift to safer haven assets.

Elsewhere, Asian stocks moved broadly lower while in Europe, shares were depressed by further poor economic news. The FTSE Eurofirst 300 index retreated 0.2 per cent to 1071.76 as data showed French industrial production declined in March and the Bank of England trimmed its 2005 growth forecast due to slowing consumer demand.

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