Investors continue to make their predictions on major currency pairs, particularly on the most traded on the currency markets, the EUR/USD. Most expectations are for a decline in the value of the euro against the US dollar, as it is not normal that with the same production costs, a plane manufactured in Europe is more expensive than an aircraft manufactured in the United States, simply because there is a difference in parity between the euro and the dollar.
This does not reflect economic and financial reality. The financial authorities of major industrialised countries should give priority to consultation and reform of the international monetary system, which should be more stable, more flexible and better reflect the economic realities. The year 2010 should provide great battles on these reforms; the crisis has highlighted the need for the emergence of a stable exchange rate system that avoids excessive volatility of currencies.
In my opinion, the year 2010 could be the year of major changes on the yuan. The yuan is the currency of China. Before 1995, two different currencies were used: the renminbi and the Foreign Exchange Currency (FEC). The FEC was designed exclusively for use by foreigners. An almost fixed parity (± 0.3 per cent) with the dollar had prevailed for a long time. It was replaced in July 2005 by an index of a basket of major world currencies. After appreciating 20 per cent in July 2008, Chinese authorities decided once again to peg their currency to the dollar.
China had begun to manage the appreciation of its currency under pressure from the US (Bush administration) and then abruptly stopped in July 2008, some say in connection with the crisis, while others said due to the Olympics, with the US elections being the other reason. From then on they strictly stabilised their real exchange rate. The EU, Japan and the US have tried in vain to convince China to change its policy. In my opinion, China will not be able to ignore indefinitely the pressure from its major trading partners.
As soon as central banks from Europe, Japan and the United States have completed their recovery process, the pressure on China should intensify. The Chinese policy, which is regarded by some as an outrageous exchange rate policy, has extended the global crisis. However, the battle will be tough; China continues to finance the United States and holds around $1,000 billion in US Treasury bonds (excluding other securities).
The truth is that the monetary world will change after the crisis: it has multiplied in its growth, its policies; its powers; it cannot remain bound to just the dollar with the Euro as the main reserve currencies.
I wish you all the best wishes for the festive season and a happy new year. Upcoming FX key events: None.
FX Technical Key points:
EUR/USD is bearish, target 1.3750, key reversal point 1.4800
USD/JPY is bullish, target 98, key reversal point 85
GBP/USD is bearish, target 1.5050, key reversal point 1.7000
USD/CHF is bullish, target 1.1000, key reversal point 0.9950
EURGBP is bullish target 1.0000, key reversal point 0.8850
AUD/USD is bearish, target 0.7800, key reversal point 0.9400
NZDUSD is bearish, target 0.6200, key reversal point 0.7650
Mr Longchamp is head of trading at RTFX Ltd.
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