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Is the Chinese Yuan Beginning to Chip Away at Dollar Dominance?

China appears to be chipping away at dollar dominance.

While there is no indication that the dollar is in imminent danger of toppling from its perch as the global reserve currency, more central banks are warming up to the yuan.

According to UBS Asset Management’s annual reserve manager survey, about 85% of central banks said they are invested in or are considering investing in the Chinese yuan. That’s up from 81% a year earlier.

USB surveyed 30 top central banks.

On average, central bank foreign exchange managers plan to hold about 5.8% of reserves in yuan within the next 10 years. That would represent a sharp increase from the 2.9% level of global reserve yuan holdings reported by the International Monetary Fund in late June.

Meanwhile, the average share of US dollar holdings dropped to 63% as of June 2022, according to the survey. That was down from 69% in the previous year.

According to Business Insider, the response to the invasion of Ukraine “has increased talk about a ‘multipolar’ world, in which the US is no longer the overwhelmingly dominant force.

There is some speculation that the weaponization of the dollar to punish Russia for the invasion of Ukraine has motivated some countries to diversify away from the dollar. Less exposure to the greenback means less exposure to diplomatic and economic pressure from Washington DC.

Declining confidence in the dollar started long before recent events in Ukraine. The Federal Reserve printed trillions of dollars out of thin air in response to COVID-19. This devalued the dollar as evidenced by the surge in prices over the last year. This was the predictable result of creating money out of thin air and handing it out to spend. More money chasing the same amount (or with governments shutting down economies fewer) goods and services will always lead to a general rise in prices.

The only reason the US can get away with this policy to the extent that it does is its role as the world reserve currency. There is a built-in global demand for dollars that helps absorb the money printing. But what happens if that demand drops? What happens if China and other countries decide they don’t want to hold a currency that is losing value every day?

After Russia invaded Ukraine, the US cut some Russian banks, including the central bank, off from the SWIFT payment system.

SWIFT stands for the Society for Worldwide Interbank Financial Telecommunication. The system enables financial institutions to send and receive information about financial transactions in a secure, standardized environment. Since the dollar serves as the world reserve currency, SWIFT facilitates the international dollar system.

SWIFT and dollar dominance gives the US a great deal of leverage over other countries.

And the US went a step further. In an unprecedented move, the Federal Reserve froze Russia’s dollar reserves. In effect, Russia’s dollar assets are valueless to the country. It can’t use them at all.

Even if you think Russia deserves these draconian economic sanctions, it’s important to remember that they could come at a cost.

Recent dollar strength compared to other world currencies suggests that the dollar remains in a strong position. But things could shift quickly. How much more borrowing and printing will the world tolerate before they become wary of holding dollars? And will the US propensity to use the dollar as a foreign policy weapon undermine trust in the greenback?

The world is watching.


Source : Schiff Gold

IMF Lifts Weighting of Dollar, Chinese Yuan in SDR Basket

The International Monetary Fund said on Saturday it has increased the weighting of the dollar and Chinese yuan in its review of the currencies that make up the valuation of its Special Drawing Rights (SDR), an international reserve asset.

The review is the first since the yuan, also known as the renminbi, joined the basket of currencies in 2016 in what was a milestone in Beijing’s efforts to internationalise its currency.

The IMF raised the U.S. currency’s weighting to 43.38 per cent from 41.73 per cent and the yuan to 12.28 per cent from 10.92 per cent. The euro’s weighting declined to 29.31 per cent from 30.93 per cent, the yen’s fell to 7.59 per cent from 8.33 per cent and the British pound fell to 7.44 per cent from 8.09 per cent.

The IMF said in a statement its executive board had determined the weighting based on trade and financial market developments from 2017 to 2021.

“Directors concurred that neither the COVID-19 pandemic nor advances in Fintech have had any major impact on the relative role of currencies in the SDR basket so far,” the IMF said.

Although the yuan’s value has declined recently, it has risen roughly 2 per cent against the dollar since 2016, and appreciated about 6 per cent against its major trading partners.

In a statement on Sunday, the People’s Bank of China said China will continue to promote the reform and opening of its financial market.

The updated weightings take effect on Aug. 1.


Source : CNA


The SDR interest rate (SDRi)

The SDRi provides the basis for calculating the interest rate charged to members on their non-concessional borrowing from the IMF and is paid to members for their remunerated creditor positions in the IMF. It is also the interest paid to members on their SDR holdings and charged on their SDR allocations.

Source : IMF

央行出手稳预期 人民币汇率长期有支撑

记者: 向家莹 张莫 . . . . . . . . .

  人民币汇率连日回调。中国外汇交易中心4月25日公布数据显示,人民币中间价报6.4909,较前一交易日下调313个基点。而就在同一日晚间,中国人民银行宣布,自5月15日起,下调金融机构外汇存款准备金率1个百分点,即外汇存款准备金率由现行的9%下调至8%,释放出强烈的稳定汇率预期的信号。

  接受《经济参考报》记者采访的业内人士表示,人民币对美元汇率快速回调主要是受美联储释放持续加息信号、美元指数走强等因素影响。伴随货币当局出手,人民币汇率持续贬值可能性较小,经济基本面稳固也将给予人民币更多支撑,我国跨境资金流动将呈现合理均衡发展格局。

汇率阶段承压 央行下调外汇存准率

  受国际金融市场波动加剧、疫情扰动以及市场供求等多重因素共同影响,近期人民币汇率一改年初强势态势,中间价连续四个交易日走低,跌幅达1189基点。与此同时,Wind数据显示,4月18日至25日的5个交易日内,在岸、离岸人民币对美元大幅走低,其中离岸人民币对美元汇率短短5个交易日贬值超过3%。

  在此背景下,央行快速出手,将外汇存款准备金率由现行的9%下调至8%。对此,国家金融与发展实验室特聘研究员任涛表示,央行下调外汇存款准备金率,相当于向市场释放出更多的美元流动性,不仅有助于提升金融机构外汇资金运用能力,也有助于缓解近期不断超调的人民币汇率,向市场传递出稳预期的强烈纠偏信号。

  “此次针对外币降准是逆周期的重要举措之一,有助于改变近期一直处于单边贬值态势的人民币行情,减弱羊群效应的影响,让人民币走势更为理性,推动人民币汇率双向波动、外汇市场趋于平衡。”任涛进一步指出。

  分析人士普遍认为,近期人民币汇率快速回调受到内外多重因素的影响。在美元指数升破100且持续强势的背景下,此轮人民币对美元汇率较快回调,属于汇市正常波动。“没有只涨不跌的货币,汇率灵活性增加,有助于及时释放压力,避免预期积累。”中银证券全球首席经济学家管涛直言。

  整体来看,今年以来人民币走势依然稳健。外汇局数据显示,今年以来,截至4月21日,美元指数上涨4.2%,欧元、英镑、日元对美元贬值幅度都在4%-10%之间。在这种情况下,人民币对美元汇率交易价略贬1.2%。从多边汇率看,中国外汇交易中心的人民币汇率指数上涨了2.4%。因此可见,人民币稳健性仍然较好。

不会持续单边回调 汇率长期有支撑

  虽然人民币汇率阶段性承压,但展望未来,分析人士普遍预计,中长期来看,人民币汇率出现持续性单边回调的概率不大,随着政策逐渐主动发力、靠前发力,预计经济增速将逐渐企稳回升,经济基本面稳固将给予人民币更多支撑。

  国家外汇管理局副局长、新闻发言人王春英说,中国经济韧性比较强,长期向好的发展态势没有改变,国际收支结构稳健,经常账户保持合理规模顺差,人民币资产具有长期投资价值,这些都会为人民币汇率基本稳定提供根本支撑。

  中国银行研究院研究员王有鑫也表示,目前汇率的快速回调很大程度上受市场悲观情绪影响,预计随着市场压力的集中释放,市场情绪将逐渐平稳,人民币将回归有序、平稳波动。“我国经济基本面稳固将给予人民币更多支撑。反观美国,在美联储快速加息后,预计经济增长预期将逐渐回落,三季度前后中外经济增长态势和货币政策走势将出现此消彼长的动态变化,届时,人民币将得到更多支撑。”他说。

  管涛说,近期人民币下跌不是外资减持人民币资产的原因而是结果。只要疫情蔓延势头得到有效控制,或是防疫措施更加精准、科学,加上宏观政策靠前发力、适时加力,经济复苏前景明朗,市场信心恢复,外资随时都可能回来,人民币汇率也会重新得到支撑。

  “应该客观看待人民币汇率的近期走势,这是多重因素作用下的市场化结果和复杂经济金融形势下的自然反应,总体反映出中美两大经济体经济与政策层面的周期性差异,亦说明人民币汇率的自动调节器功能在内外均衡中得到了更为有效的发挥。”任涛也表示。

市场有韧性 跨境资金流动长期将合理均衡

  业内人士认为,人民币汇率阶段性走弱会在短期内加剧跨境资本流出压力,不过长期来看,我国跨境资金流动也将呈现合理均衡发展格局。

  《2021年第四季度中国货币政策执行报告》指出,发达经济体宏观政策总体退坡,不仅可能伴生资产价格震荡调整的金融风险,还会通过贸易往来、资本流动、金融市场等渠道对新兴经济体产生明显外溢效应。“对于一个经济体的国际收支和跨境资本流动来说,美联储加息的确是一个重要的外部影响变量,但是根本因素还是自身宏观基本面和市场基础。对中国来讲,近年来中国外汇市场韧性不断增强,有基础和有条件适应本轮美联储政策调整。”王春英表示。

  在任涛看来,汇率波动既是预期的结果,又会在一定程度上改变市场预期,人民币汇率阶段性走弱会在短期内加剧跨境资本流出压力,但人民币汇率的双向波动以及丰富的政策工具箱则有助于跨境资本流动中长期内保持在可控范围内。因此,虽然短期内未来人民币汇率双向波动与跨境资本双向流动的均衡可能会被打破,但中长期内保持平衡仍将是主流。

  王有鑫表示,考虑到我国通胀率较低,实际利率仍然明显高于国外,随着市场形势稳定,短期资金将再度流入增持人民币资产,这在过去几轮市场波动中已多次得到验证。此外,对于直接投资和贸易顺差等长期跨境资金来说,受汇率影响较小,人民币汇率的适度回调有利于提高出口企业竞争力,发挥汇率的国际收支自动稳定器和调节器功能。因此,目前市场需要更多耐心、需要更加稳定的预期,在短期波动之后,跨境资本流动仍将维持流入态势。


Source : 新华网

Chart: Divergence of Japanese Yen and Chinese Yuan

Source : Trading Economics

Chart: International Payments Using the Renminbi Jumped to a Record High in January 2022

Source : BNN Bloomberg

关于调整CFETS人民币汇率指数货币篮子权重的公告

为进一步增强CFETS人民币汇率指数货币篮子代表性,中国外汇交易中心(以下简称交易中心)拟根据《CFETS人民币汇率指数货币篮子调整规则》(中汇交公告〔2016〕81号)调整CFETS人民币汇率指数货币篮子的权重,新版指数自2022年1月1日起生效。

一、调整CFETS人民币汇率指数的货币篮子权重

CFETS人民币汇率指数的篮子货币权重是采用考虑转口贸易因素的贸易权重法计算而得,现版指数采用的是2019年度贸易数据。为进一步增强指数代表性,新版指数采用2020年度贸易数据作为权重进行调整。经历史回溯试算,新版和现版CFETS人民币汇率指数运行趋势基本吻合。

二、保持BIS货币篮子和权重不变

国际清算银行(BIS)自2019年4月以来未调整汇率指数的货币篮子及权重,故交易中心继续保持BIS货币篮子人民币汇率指数的货币篮子和权重不变。

三、保持SDR货币篮子和权重不变

自2016年10月1日人民币正式加入SDR货币篮子以来,SDR货币篮子及权重未发生改变,故交易中心继续保持SDR货币篮子人民币汇率指数的货币篮子和权重不变。


Source : 中国外汇交易中心暨全国银行间同业拆借中心

How the Yuan Could Become a Global Currency

Kimberly Amadeo wrote . . . . . . . . .

China wants its currency, the yuan, to replace the U.S. dollar as the world’s global currency. That would give it more control over its economy.

As China’s economic might grows, it’s taking steps to make that happen. A slim majority of institutional investors see it as inevitable, but don’t say when.1 Could we see a switch from a greenback- to a redback-dominated world? If so, how and when would that happen? What would be the consequences?

Key Takeaways

China is working hard to make the yuan the next global currency. Although presently a reserve currency, the yuan can’t upstage the U.S. dollar unless the following scenarios happen:

  • Central banks around the world choose to keep a total of at least $700 billion worth of yuan in foreign exchange reserves.
  • The People’s Bank of China (PBOC) allows free trade of the yuan and relaxes its peg to the U.S. dollar.
  • The PBOC becomes straightforward about its future intentions with the yuan.
  • China’s financial markets turn transparent.
  • Chinese monetary policies are perceived as stable.
  • The yuan acquires the U.S. dollar’s reputation of stability, which is backed by the enormity and liquidity of U.S. Treasurys.

Before the yuan can become a global currency, it must first be successful as a reserve currency. That would give China the following five benefits:

  • The yuan would be used to price more international contracts. China exports a lot of commodities that are traditionally priced in U.S. dollars. If they were priced in yuan, China would not have to worry so much about the dollar’s value.
  • All central banks would have to hold yuan as part of their foreign exchange reserves. The yuan would be in higher demand. That would lower interest rates for bonds denominated in yuan.
  • Chinese exporters would have lower borrowing costs.
  • China would have more economic clout in relation to the United States.
  • It would support President Jinping’s economic reforms.

How the Yuan Is Becoming a Reserve Currency

On December 1, 2015, the International Monetary Fund (IMF) announced that it awarded the yuan status as a reserve currency. The IMF added the yuan to its Special Drawing Rights basket on October 1, 2016. This basket currently includes the euro, Japanese yen, British pound, and U.S. dollar.

Why did the IMF make this decision? China’s leaders want to improve the standard of living and increase its economic output The Chinese have “pegged the yuan” to the U.S. dollar but via an adjustable peg, or “managed peg.” This floating peg has generally been on a downward trend since 2015, implying that the yuan has been steadily devaluing against the dollar, thus making Chinese exports relatively more competitive against dollar prices around the world. That allowed China’s economic growth to soar thanks to low-cost exports to the United States.4 As a result, China’s share of international trade and gross domestic product grew to around 10%.5 This has been a source of trade friction between China and the U.S.

As trade grew, so did the yuan’s popularity. In August 2015, it became the fourth most-used currency in the world. It rose from 12th position in just three years. It surpassed the Japanese yen, Canadian loonie, and the Australian dollar.

Central banks should increase their foreign exchange reserves of yuan to provide funds for that level of trade. Central banks alone should purchase about $700 billion worth of yuan. But banks never purchased all the euros they should have, even when the European Union was the world’s largest economy. Most international transactions are still done in U.S. dollars, even though its trade has dropped.

The IMF requires China to liberalize its capital markets. It should allow the yuan to be freely traded on foreign exchange markets. That allows central banks to hold it as a reserve currency. For that to happen, China’s central bank must relax the yuan’s peg to the dollar.

China must have clearer communications about its future actions regarding the yuan. That’s what the Federal Reserve does at each of its eight Federal Open Market Committee (FOMC) meetings.

In August 2015, the PBOC relaxed the yuan to dollar conversion rate.

Instead of a fixed exchange rate, it would set the yuan’s value to its closing value on the previous day. Instead of rising, as many expected, the yuan fell 3% over the next two days.

The PBOC stabilized the rate. It now has the freedom to allow the yuan to be a stronger tool in monetary policy. The drop also silenced critics of China’s reforms, many of whom were members of the U.S. Congress.

In December 2015, the Bank announced it would begin to shift the dollar peg to a basket of currencies. That basket includes the dollar, euro, yen, and 10 other currencies.11

The Yuan Is Slowly Being Traded in Foreign Markets

Chinese leaders are beginning to make it easier to trade the yuan in foreign exchange markets. To do this risks more open financial and political systems. On March 23, 2015, China backed the Renminbi Trading Hub for the Americas. The renminbi is another name for the yuan. That makes it easier for North American companies to conduct yuan transactions in Canadian banks. China opened up similar trading hubs in Singapore and London.

Former New York City Mayor Michael Bloomberg is Chair of the Working Group on U.S. RMB Trading and Clearing group. It is creating a renminbi trading center in the United States. The group includes former U.S. Treasury Secretaries Hank Paulson and Timothy Geithner. Such a center would lower costs for U.S. companies trading with China. It would also allow U.S. financial companies to offer yuan-denominated hedges and other derivatives.

On June 8, 2016, China granted the United States a quota of 250 billion yuan, the equivalent of $38 billion, under China’s Renminbi Qualified Foreign Institutional Investor program.

Can the Yuan Replace the Dollar?

The level of trade is not the only reason the U.S. dollar is the world’s reserve currency. The strength of the U.S. economy instills trust. Most important are the transparency of U.S. financial markets and the stability of its monetary policy.

On the other hand, Stuart Oakley, managing director of Nomura, pointed out in a 2013 article that China owns $4 trillion to $5 trillion of unallocated central bank reserves and these could be in yuan. As more bilateral swap lines are set up and China moves further down its path of capital market liberalization, central banks’ appetite to own this currency will grow.

Could China’s ambition to make the yuan the world’s currency lead to a dollar collapse? Probably not. Instead, it will be a long, slow process that results in a dollar decline, not a collapse.


Source : The Balance

Why the Wind Behind the Chinese Yuan’s Strength Is Likely to Die Down in 2022

Neal Kimberley wrote . . . . . . . . .

Even without a pandemic, rebalancing an economy the size of China’s would be no easy task. But that’s what Beijing aims to do. Monetary policy support from the People’s Bank of China will help keep Chinese economic growth on track. The yuan also has a part to play, but it will be a changing role.

The currency market may choose to recalibrate its view of China’s currency in 2022. Yuan strength could then begin to wane.

The prevailing wind in the currency market has been behind the yuan in 2021, lending it strength even as the Chinese economy has been navigating troubled waters amid problems in the property sector, an energy crunch and the resulting power cuts and, most recently, an uptick in Covid-19 cases.

To a large extent, present renminbi strength is a reflection of the foreign exchange market’s view that, despite China’s own problems, it is still a better bet than a lot of other economies.

The fact that yield differentials have favoured the yuan, as the PBOC took a more nuanced approach to monetary policy support than many other central banks, has also played no small part in enhancing the renminbi’s allure.

This prevailing wind may blow a while longer. Noting the possibility of an improvement in China-US trade relations, and feeling that “Chinese exporters have yet to restore their (foreign exchange) conversion ratios to levels seen before trade tensions, so they still have excess (US dollar) savings to unload”, HSBC reassessed its view on the yuan last week. It lowered its first-quarter 2022 forecast for the US dollar/Chinese yuan exchange rate to 6.40 from the previous 6.60.

HSBC also made the point that China’s current account surplus continues to underpin the yuan’s value.

Meanwhile the pandemic-related absence of outbound tourism from China, which necessarily results in selling of the renminbi, continues to remove a factor from the equation that would ordinarily weigh on the value of the Chinese currency.

Additionally, the strong yuan is a useful ally for Beijing in partially offsetting the impact of increases in US dollar-denominated energy prices that have been evident globally in recent months.

To the extent that yuan strength seems to currently suit Beijing, but where China’s economic interests seem best served by continuing with supportive monetary policy settings, the PBOC will have to make deft use of the policy levers at its disposal.

With that in mind, as other major economies appear on the cusp of tightening monetary policy that will erode yield differentials currently favouring the yuan, the PBOC might be inclined to avoid exacerbating the situation with cuts in China’s reserve requirement ratio in the coming months. Rather, it may prefer to use liquidity injections to support the economy.

The fact is that, with rising consumer price inflation having become an issue in economies such as Australia, Britain, Canada and the United States, it is now just a question of how far, rather than whether, their central banks will tighten monetary policy.

As yield differentials that have previously favoured the yuan narrow, the currency market might logically infer that there are more reasons to hold the currencies of countries such as the US that have tightened monetary policy, and, by extension, fewer reasons to hold the renminbi.

Higher yields on US Treasuries also mean lower prices for those same bonds. If, along with this process, markets also perceived that China-US relations were on the mend, they might also envisage a situation where Beijing again becomes an active Treasuries buyer.

That could then add a layer of support for the US dollar versus the renminbi. It might even suit Beijing and Washington to allow such a perception to build.

On the assumption that either an increase in energy supply or – less welcome economically – evidence of energy demand destruction will eventually curtail the fossil fuel inflationary pressures, then going into 2022, policymakers are likely to turn their attention to how to take advantage of any normalisation in global economic activity.

In such circumstances, Beijing might feel that China’s still-critical export sector could benefit from a degree of yuan weakness without it harming the Chinese economy as a whole. Meanwhile, Washington might see a degree of renminbi weakness, at least temporarily, as a price worth paying to obtain some imported disinflation.

All currencies wax and wane, even the yuan. Next year might see the renminbi wane a little.


Source : MSN

Chart: China’s CFETS RMB Index Rose to 5-year High

Weaker Yuan May Be an Inflation Salve for the World

John Authers wrote . . . . . . . . .

A news-starved market will soon have some more data to feed on. Tuesday brings U.S. inflation, which really matters these days, and then a range of banks will start reporting earnings for the second quarter. For a foretaste of what could be on offer, let’s head to the world’s other leading economy, China.

At the end of last week, the People’s Bank of China started what looked like a new easing cycle by cutting the amount of money banks needed to keep in reserve when lending. The U.S. is still dominated by concern over when and whether the Federal Reserve will start to tighten. There is a reason for this; while the U.S. braces for core consumer price inflation as high as 4% for the month of June, China had core CPI of just 1%.

That is quite a disjunction for two economies that share the same global economy, ever more fractiously. But China hasn’t escaped price pressures altogether. While consumer inflation remains under control, producer prices, measuring the costs paid by companies, are registering their highest increases since the commodity spike that preceded the global financial crisis in 2008. While the two measures often differ, the present gap is the widest this century.

This implies a nasty profit squeeze for China’s companies. Producers are battling a big rise in costs but they aren’t, apparently, passing any of them on to customers. On closer inspection, it looks as though the cost inflation is restricted to big industrial items. A sectoral breakdown in China’s PPI, in the following chart from Commerzbank AG, reveals a minimal problem for consumer goods.

The implication of such low consumer price inflation is disquieting. China is supposed to be roaring ahead as shoppers start spending and the economy benefits from demand that remained pent up during the pandemic. This cannot be encouraging. There are big differences between the two big economies, and China is hoping to finish the transition from a manufacturing-led economy to a consumption-led one, like the U.S. But it is still troubling that consumers are creating so little upward pressure on prices.

For the rest of the world, the more important measure is producer price inflation, which stands to affect the price at which China sells goods into export markets. The clear reason for the high PPI is commodity price inflation. The following chart compares PPI with the Bloomberg Economics China PPI Inflation Tracker, which produces a monthly prediction based on a combination of four commodity price indexes. The Bloomberg tracker has been remarkably accurate over the last decade, and suffered its biggest overshoot last month.

Why might this have happened? China Beige Book International, which produces data on the Chinese economy, says this reflects concerted attempts by the authorities to squeeze out speculative excess in commodities. According to Shehzad Qazi, China Beige Book’s managing director:

Beijing’s latest efforts to cool prices, from threatening speculators to unloading government stockpiles, have ignited a roaring debate over whether the Party can smother the rally. But this fundamentally misunderstands the policy mindset. Rather than trying to sustainably reverse price hikes, which reflect demand recovery and breakdowns in supply chains, the real goal is to drive the speculative “moneyball” out of Commodities.

He also suggests that escalating producer prices don’t mean China is exporting inflation to the rest of the world — or at least not as badly as might be feared. This chart shows China Beige Book’s diffusion indexes for the different manufacturing sectors. Metals and chemicals are suffering the worst problems. Consumer electronics and textiles, the main exporting sectors, also register rising pressure, but have much less of an issue for the moment. So China is exporting inflation, but not that much.

There is an important readthrough for currencies. China’s international competitiveness is a function of producer prices and exchange rates. To see how much the exchange rate is limiting its ability to compete in foreign markets, we need to look at relative levels of producer price inflation in different countries. Taking PPI into account, JPMorgan Chase & Co. produces the following index to show China’s broad effective exchange rate, compared to a range of its biggest trade partners in real terms. China’s most recent devaluation crisis came in August 2015, with its broad PPI-weighted exchange rate at more or less exactly the same level it is now. When it subsequently reached this level in early 2018, it was soon followed by a fall.

All of this suggests that the yuan may well now be as strong as the Chinese authorities can bear. It doesn’t float freely, of course, and its peaks represent levels of tolerance among Chinese officials, rather than landmarks in market psychology. Thus, the chances are that weight will be put on the yuan to weaken from here. That would mean relative strength for the dollar, and would also at the margin imply lower import prices and lower inflation in the U.S. and Europe.

I warned last month that China might effectively be exporting inflation to the U.S. Judging by the big gap in core inflation rates between the two countries, something along those lines has been occurring. But that changes if the latest shift in Chinese monetary policy, in response to what looks like a worryingly feeble consumer sector at home, really does mean that a weaker yuan is in the cards. In such circumstances, the prospect is that one source of inflationary pressure for the U.S. and Europe will reduce. That lies in the future. For June, the continuing strange effects of the pandemic on the Chinese economy will have prodded U.S. inflation upward. We will soon learn a lot more about exactly how much U.S. prices rose last month.


Source : Bloomberg