Following last week's comments from China, where the Central Bank Governor opened up to eventually allow the yuan to rise, this week we returned to normality as officials from the government, including Prime Minister Wen Jiabao, reiterated that the yuan is not undervalued.
The People's Bank of China Governor Zhou Xiaochuan said Beijing would "sooner or later" have to drop its "special" yuan policy. China has been under intense pressure from the US and Europe to drop the exchange rate peg of around 6.83 yuan per US dollar which it instituted to weather the financial crisis.
But Prime Minister Wen Jiabao on Sunday dismissed US complaints about China's exchange rate, calling them counter-productive and saying he did not believe the yuan was undervalued.
China again rejected US demands for a stronger yuan, saying the currency's exchange rate was not a reason for trade surplus with the United States. Responding to a letter sent by 130 US lawmakers on Monday to the Obama Administration, urging the government to address China's "currency manipulation", Commerce Ministry spokesman Yao Jian said: "The surplus is not caused by the renminbi exchange rate," and added that "the United States should be a promoter of free trade, not an obstacle to it."
In the letter sent to US Treasury Secretary Timothy Geithner and Commerce Secretary Gary Locke, the US lawmakers said: "The impact of China's currency manipulation on the US economy cannot be overstated. Maintaining its currency at a devalued exchange rate provides a subsidy to Chinese companies and unfairly disadvantages foreign competitors."
In Europe, the situation in Greece continues to dominate the agenda. On Monday, ministers from the 16-country eurozone announced that they had agreed the "technical modalities" for eventually helping Greece, should it seek such aid. However, German and Spanish ministers reiterated that Greece did not need help for now. Help for Greece could take the form of bilateral aid, but ministers ruled out loan guarantees, said Jean-Claude Juncker, the Luxembourg Prime Minister and president of the Eurogroup who chaired Monday's talks.
The statement published by the eurozone ministers provided no figures. It commended Greece's redoubled efforts to repair its public finances and said the rest of the Eurogroup (all countries using the euro as currency) stood ready to help. Greece earlier this month unveiled extra austerity measures to reduce its deficit from 12.7 per cent to 8.7 per cent of its GDP this year, including cuts in public sector pay and tax rises.
Moody's Investors Services said the US and the UK are moving closer to losing their AAA debt ratings.
Moody's said the two nations must balance bringing down their debt burdens while not damaging growth. The US is projected to spend more on debt servicing (as a percentage of revenues) this year than any other top rated sovereign, except the UK. But the US will be the biggest spender from 2011 to 2013. The US is expected to spend some seven per cent of revenue on debt servicing this year, and nearly 11 per cent by 2013, according to baseline assumptions of a modest recovery, fiscal adjustments in line with government plans, and a gradual increase in interest rates. The UK is expected to spend seven per cent of its revenues this year, and nine per cent in 2013, rising to almost 12 per cent according to an adverse scenario.
Financing costs above 10 per cent could knock countries out of their AAA status and into a "debt reversibility band", the size of which depends on the ability and willingness of countries to reduce their debt burden by raising taxes or cutting spending. But the likelihood of such a scenario actually playing out is slim.
Having traded again above 1.52 earlier in the week, the pound sterling is again under pressure and began the week with a downward movement of nearly two cents. A break of 1.50 in the pair GBP/USD should pave the way to 1.4875 and 1.4750 in an environment where encouraging news for the British economy is still lacking.
Upcoming FX key events
Today: US CPI.
Tomorrow: Canada CPI, Canada Retail Sales.
FX technical key points
EUR/USD is bearish, target 1.3000, key reversal point 1.4200
USD/JPY is bullish, target 98, key reversal point 85
GBP/USD is bearish, target 1.4750, key reversal point 1.5700
USD/CHF is bullish, target 1.1000, key reversal point 0.9950
AUD/USD is bearish, target 0.7800, key reversal point 0.9400
NZD/USD is bearish, target 0.6200, key reversal point 0.7650
Mr Bovay is senior trader at RTFX Ltd.
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