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Home / Business / How the Fed is more nuanced politics and other currencies are falling good news for the yuan

How the Fed is more nuanced politics and other currencies are falling good news for the yuan



The yuan may surprise on the upside in the coming months. China's economy undoubtedly faces challenges, but so do many others. Other currencies are starting to look less appealing, just as the move to attract more foreign capital to China may lead to greater exposure to yuan-denominated assets.

With uncertainty building on the global economy, it may seem strange to chill the virtues of the yuan. After all, such doubts can be expected to result in investor surrender risking having historically resulted in less appetite for emerging markets, of which yuan-denominated assets are an important component.

But any currency trading is a comparative calculation, and it can work for the benefit of the renminbi.

On the kinase side of the equation, as a phase relationship ̵

1; from April – of Chinese government bonds and securities banknotes in the Bloomberg Barclays Global Aggregate index is moving at USD 54 trillion. be yuan-supportive. Passively managed mutual funds and other index trackers will have more exposure to Chinese securities.

In addition, China recently approved a Beijing-based but wholly-owned entity by S & P Global Ratings to conduct mainland credit rating activities. It should provide greater security to actively managed funds that have a mandate to invest in Chinese assets.

Many large investors remain underweight in yuan-denominated assets. Norway's USD 1 billion investment fund, the world's largest government bond fund, has a "total investment in China at this stage", which is "less than 3 percent of the portfolio," says CEO Yngve Slyngstad to Bloomberg on 2 February.

"I think over time, given that Chinese GDP is a much higher percentage of [the world economy]it is natural that we will invest much more in the Chinese market," said Slyngstad.

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With an undercurrent of demand for Chinese assets when investment opportunities and conditions in China are supposed to be more conducive to such capital inflows, there may be solid demand for the yuan.

Of course, there are risk factors that may have a negative impact on the investment mood, not least the unresolved US and China trade war, but investors must also consider whether alternatives to yuan give a better risk return on yuan-denominated assets.

A significant depreciation of the yuan against the US dollar will probably only happen if trade tensions are escalated, which neither Beijing nor Washington may want to see.

For the US dollar, while a success of interest rate hikes and the associated process of quantitative tightening have supported the dollar strength, federal bank position is now more nuanced.

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The Fed does not seem to hurry to raise interest rates again and can limit its efforts to reduce the size of the balance earlier than previously thought. This can reduce the dollar's attraction against currencies that yield better returns, a category where the yuan will fall. But Fed's current attitude does not necessarily mean that the dollar's underperformance against other major currencies generally.

Although investors are prepared to ignore growing evidence of economic weakness in Germany, and that Italy is already in recession, it is difficult to earn any positive return on government bonds in euros. Data released by the Tradeweb platform on February 4 showed that about $ 2.98 trillion (US $ 3.36 trillion), of the $ 7.5 trillion in euro government bonds in the system, has a negative dividend. That's almost 40 percent.

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Investors also have to agree that the Australian Central Bank last week held its benchmark price record at a record low of 1.5 percent, moving it away from its previous tightening bias. "Throughout last year it looked more likely to me that the next level of interest rates would be upside down. But now things are more balanced," said Reserve Bank of Australia Governor Philip Lowe.

Older places, in a speech on February 6, said the bank in Canada, Deputy Timothy Lane, how a "combination of factors has put pressure on the Canadian dollar" and that "the lower Canadian dollar in turn will contribute to support the economy through this period ".

For a moment, when the investment environment for those seeking access to Chinese assets is better, other investment goals are less attractive. In the coming months, the yuan can surpass, hold its own against the US dollar and make gains against the likes of the euro and Australian and Canadian dollars.

Neal Kimberley is a commentator on macroeconomics and financial markets [19659021] window.fbAsyncInit = function () {
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