Trader in Residence and The third plenum of the 18th Central Committee –“YUAN” Impact

January 25, 2014

Trader in Residence – TiR

The DeGroote Trading Centers will be hosting Trader in Residence, a speaker series being industry professionals in DeGroote to discuss their success in their field of business. The series takes places Tuesdays at 5:30PM in the Ron Joyce Center, RJC, in room 136 and is also viewable via a 2 way camera in the Gould Trading Floor located at 122A in the DeGroote School of Business, DSB.

Drinks and food will be provided at the DSB location.

For further information regarding the series please visit: https://trading.degroote.mcmaster.ca/trader-in-residence/

The list of upcoming speakers is as follows:

Tuesday January 28 –  Arjun Kumar of Spruce Grove Investment Management

 

The third plenum of the 18th Central Committee –“YUAN” Impact

By: Jessie Wu

On Nov. 18th China’s Foreign Exchange Trade Center — who is authorized to announce the exchange rate of the Yuan vs. USD — announced a 19 basis point drop from previous day’s trading at a rate 6.1332. Last week it hit a historical high of 6.1315. For the medium term future experts say the third plenum of the 18th Central Committee — which just finished this Monday — would push the economy within China. This will help push an appreciating RMB, with the potential for the rate to break 6 within the next year.

Since early this year, the RMB appreciation against the dollar median is about 2.5%, far above last year’s 1% increase. One of the state-owned commercial bank traders estimated that before the market worries about the US Federal Reserve’s exit of Quantitative Easing (QE), foreign exchange will present a net inflow. Recent hot money inflows into China accelerated, which shows the market for the Yuan being strong and expected to increase in the future. Due to the reform oriented policy released from the third plenum of the 18th Central Committee and the latest issue of positive macroeconomic data, there will be enhanced confidence in international markets in China’s continued growth. As foreign capital flows into the Chinese economy this further allows the Yuan to appreciate.

The third plenum of the 18th Central Committee bulletin stated that the market function would shift from “basic function” to “decisive function” in the allocation of resources. This is a huge step up for the Chinese market as well as the global markets. On one hand, this would increase the expectation of financial market reformation in China. On the potential for market forces to drive interest rates and RMB internationalization, the possibility of the RMB exchange rate going up is increased. The reformations outlined in the third plenum of the 18th Central Committee released will also continue to inspire China’s economic growth potential. As many of the world’s major economic powers continue to grow slowly, the RMB will definitely be more attractive.

In the long term, if the FED decides to withdraw from QE in March of next year, capital will flow to U.S. dollar assets and emerging markets will face capital outflow pressure. In this scenario the continued appreciation of Yuan could change. But before that, the RMB will most likely stay high and be sought after.

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