Chuck Butler

by Chuck Butler

“Public Announcement of the People’s Bank of China on Reforming the RMB Exchange Rate Regime.”

This was the announcement that came across the screens this morning. Finally! China had announced that they no longer would peg the renminbi to the dollar. This had been the news that investors have waited for over two years to hear. The “floating currencies” of Asia are moving stronger vs. the dollar on the news, and should continue as this new renminbi exchange rate regime unfolds.

I view this move by the People’s Bank of China (PBOC) as simply symbolic at this point, as the (PBOC) gets to soothe the feathers of the U.S., and slam the door on the fingers of the currency speculators. However, as I’ve explained to our customers in the past… This will lead to other currencies in the region to allow their currencies to gain vs. the dollar. We’ve already seen evidence of this in the announcement by Malaysia that they would also drop their currency peg to the dollar!

Here’s the skinny on the move…

Starting today, China will reform the exchange rate regime by moving into a managed float exchange rate regime based on market supply and demand with reference to a basket of currencies. Renminbi will no longer be pegged to the U.S. dollar.

There is no word at this point regarding the mix and weightings of the currencies in their new basket. I would think that a mix of 20% yen, 20% euro, 20% dollars, with other trading partner currencies making up the difference as a good start. If the final basket looks like this, I would think that yen, euro and other trading partner currencies would benefit greatly, while dollars would be sold, bringing the dollar back to the underlying weak dollar trend.

In addition, I don’t think that the influence on the floating Asian currencies, like, Japanese yen, Singapore dollars, and Thai baht, can be downplayed one iota. Recently, these currencies have been pressured by the dollar due to Fed tightening and higher oil prices. I think that now that this move has been made by China, the markets’ overall focus can be readjusted to the massive U.S. Current Account Deficit, and how a weaker dollar vs. these Asian currencies can go a long way toward a correction in the Current Account.

We should not only look for currencies to move on this announcement, U.S. Treasuries should see some pressure due to the fact that China’s currency change could lead them to buy fewer Treasuries going forward.

And finally, should this move not achieve the currency movement that the U.S. government wants to see, I would expect the U.S. government to re-apply the pressure for further moves by the Chinese.

Chuck Butler

Chuck Butler is President of EverBank

Recent Articles

Video
Creditism and the Threat of a New Depression

Richard Duncan

In the 1960s, total credit in the U.S. broke the one trillion dollar mark...and since then, it has expanded over 50 times. But now, as Richard Duncan explains, the explosion of credit that's made America prosperous, threatens to take the entire economy down. And that could mean the return of another depression...


Advance Notice of the Next Market Crash

Chris Mayer

News flash: The future is uncertain. (Gasp!) But given this uncertainty how are you supposed to invest successfully? It would be nice to ride stocks on the way up... and bow out before the crash... but few are able to do it without sheer luck. Chris Mayer, searching for a successful method, looks back to the 1929 market crash for clues...


A New Bank that Challenges the US Dollar’s Reserve Status

Liam Halligan

As owner of the world's reserve currency, the US has enjoyed a cushy spot in the global economy. But with the rise of a group of rival countries the dollar's reserve status is under attack. And if it somehow gets knocked off its perch, the effects throughout the world (and in the US in particular) would be disastrous. Liam Halligan explains...


Diverse Opportunities in the Boomer-Controlled Market

Greg Guenthner

The US population is aging. The total number of births in the US peaked over seven years ago. And as the Baby Boomer generation enters retirement, it's becoming clear that there's no easy way to offset the trend. And that presents some unique investment opportunities most people have overlooked. Greg Guenthner explains...


5 Min. Forecast
What Your Grocery Bill Says About Your Investment Future

Dave Gonigam

Despite rapidly rising food prices, American households still spend relatively little on groceries. And while plenty of factors contribute to lower food costs in the US, that can lead to serious competition... and that means a good investment opportunity is right around the corner. Dave Gonigam explores...