High Yielding Currencies

GBP/High Yielding Currencies

The pound recovered against the high yielding currencies yesterday as a combination of the UK emergency budget and China pulling back the veil on its new currency regime a little further on Tuesday, appearing to engineer a fall in the Yuan to make clear its vow of flexibility did not include one-way bets for appreciation helped the pound retrace against the Australian Dollar, New Zealand Dollar and South African Rand.

Big Chinese state-owned banks kept the Yuan in check, a day after its biggest rise since the currency was revalued in 2005, and the Foreign Ministry said change would be gradual, indicating the Yuan’s appreciation will be far slower than the pace demanded by critics in the West.

China has started to relax its control over the Yuan ahead of this weekend’s G20 summit of world leaders in Canada, breaking a two-year dollar peg that had been a lightning rod for critics who say the currency is undervalued and gives Chinese exporters an unfair trade advantage.

“China has backed up all the talk with action, and President Hu (Jintao) will arrive in Toronto later this week with tangible evidence that China is serious about increasing the flexibility of its exchange rate,” said Brian Jackson, strategist with Royal Bank of Canada in Hong Kong.

“We still may see moves in either direction from day to day, but we think the trend in the weeks and months ahead will be for the Yuan to make limited but meaningful gains against the dollar.”

Under its new freedom, the Yuan rose on Monday more than 0.4 percent, the biggest rise in a day since its landmark revaluation in 2005. It also came close to hitting its trading limit of 0.5 percent, an amount the currency can move either side of a reference point set each morning by the central bank.

On Tuesday, the Yuan fell just over 0.2 percent.

The fall disappointed many market players, who had initially thought the central bank’s decision to set the reference rate in line with Monday’s close was a sign that it was willing to let the currency strengthen further.

State-owned banks stepped in to the market by mid-morning and aggressively bought dollars, traders said, suggesting authorities want to control the pace of the Yuan’s appreciation.

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