China Ready To Break A Hard Peg With The Dollar

Reuters reports that China Ready To Break A Hard Peg With The Dollar.

(emphasis mine) [my comment]

Grains Week Ahead-Yuan move welcome, but all eyes on weather
Sun Jun 20, 2010 11:48am EDT

* China currency shift will raise its buying power
* Leading commodity buyer also now seeing crop worries
* Global weather patterns sour, underpinning prices

By Sam Nelson and Christine Stebbins

CHICAGO, June 20 (Reuters) - China's surprising move over the weekend signaling a new willingness to let its currency gain strength may give grain prices an initial boost this week, but recent adverse weather for world crops will be more important.

"I, and a few other commercials, see the news as mildly supportive. More important may be how the external commodity markets react to the news," said Dan Basse, president of grain and livestock industry consultant AgResource in Chicago.

"Chinese and U.S. weather is much more important to grain price direction in the week ahead," he said.

In what was seen as a largely political move to deflect criticism of its fixed exchange rate ahead of the G20 meeting this week, China's central bank on Saturday indicated it was ready to break a hard peg with the dollar that has come under intense criticism from the United States and other countries.

"This sounds more serious than previous rhetoric coming out of Beijing, but it would be wise to initially take the news with a grain of salt," said Bill Lapp, an economist with Advanced Economic Solutions in Omaha, Nebraska.

"The exchange rate flexibility is presumably an effort to tame inflation, which we have already observed in their recent purchases of US corn. In other words, a stronger yuan benefits U.S. ag exports. But we have already seen some benefit.

Chicago Board of Trade wheat and corn futures rallied to three-week highs on Friday and soybeans traded around a one-month peak because of the turn to adverse crop weather.

So analysts say there could be follow-through strength in the markets this week if harsh weather patterns persist.

My reaction: China is now “ready to break” its hard peg with the dollar. This will add purchasing power to the Chinese consumer, and its agricultural imports will increase, driving prices higher.

This entry was posted in China, Food_Crisis, News_Developments. Bookmark the permalink.

2 Responses to China Ready To Break A Hard Peg With The Dollar

  1. Aesir says:

    Are there current indications as to why China is breaking the peg? Is it because of domestic food problems like you predicted, Eric, or are there other driving forces right now?

  2. Ken says:

    Not a coincidence that there is a G20 meeting this coming weekend. China doesn't want any grief at that meeting from others. This move insures they won't get any. Don't expect a big change anytime soon in the exchange rate. Many Chinese companies operate on very thin margins. This will put many out of business causing political pressure at home to minimize a yuan rise of any significance.

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