To: regli who wrote (34019 ) 7/22/2005 7:30:55 AM From: Chispas Respond to What an exciting day in the currency markets! China announces revaluation, there were more bombings (to our dismay) in London, jobless claims fell by the biggest amount in 2.5 years while Greenspan was fielding questions once again in the Senate. For a detailed recap of the Chinese revaluation and its effect on global markets, please visit our sister site www.chinarevaluation.com. Chinese revaluation was definitely the big event that the markets has been anticipating for months now if not years. China has finally caved in and delivered a 2.1% revaluation with further plans to move to a managed float against a basket of currencies. Even though the move is extremely extremely small, its significance is not. Many predict that this is only the beginning of more revaluation announcements to come. First of which, the components of the basket have yet to be announced and need to be. Given that 65% of China’s trade is with the European Union (18.5%), the US (17.5%), Japan (18%), and Hong Kong (11%), the basket would naturally have to include not only US dollars, but also Euros and Japanese Yen. As a result, at some time, China would have to replace its US Treasury holdings with holdings of Eurozone and Japanese government bonds. When that occurs and China begins their accumulation, it should be very beneficial for the Euro and Japanese Yen. Chinese revaluation also takes some pressure off of the Federal Reserve to raise rates more aggressively than they may have wanted to. A revaluation means that a big buyer of US Treasuries is leaving the market and the prospect of that occuring has already hit bonds hard. The sell-off in US Treasuries is sending yields soaring and effectively helping to resolve the “yield curve conundrum” and the excess stimulus that they have been providing for the US economy. China’s surprising announcement a week or so after the US time stamped a possible Chinese revaluation suggests that this is certainly more about politics than economics. As a result, we expect China’s buying spree to pick up in the months to come. Shifting over to other news, the economic data released today was indicative of the improving conditions in the US. The Philly Fed survey, leading indicators report and jobless claims all rebounded from the previous month. Jobless claims fell by the largest amount in 2.5 years, but the drop was most likely distorted by the auto-retooling period. Greenspan for the most part kept most of his comments unchanged from yesterday....dailyfx.com
