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So it's a way to shift the basket of foreign currencies you're holding in your central bank's vault without getting ripped off by hot money speculators?

But if you're propping up the € instead of the US$, doesn't that imply falling US$/€ exchange rates? Shouldn't it be possible to detect this shift when looking at a five- or ten-year time series?

And if I want to take a class that lets me understand the mechanics of how all this works, what kinds of words do I need to look for in the course description?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 28th, 2009 at 03:38:49 PM EST
[ Parent ]
Note that its over the course of a year to a year and a half in the mini-utopia ... they shifted their basket in 2010 and the crisis hit in 2011 ... and, indeed, the story is premised on an inability to keep that kind of move masked in the face of a strong headwind.

So, yes, there would be a trend in US$/€ exchange rates, but there is a whole industry of people employed to come up with stories "explaining" those kinds of moves from one day to the next, and in the scenario it would be perfectly easily rationalized as due to the stronger growth in the EU.

As long as the underlying pressure is not too strong and sudden, it is easy for a lot of information to be hidden in the noise over six months to a year. That's why its a controversy that brings the stability of the US central bank into question that sparks off the need for the Chinese to decide whether to return to directly pegging against the dollar or to stop masking the change in the composition of their peg.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Mon Sep 28th, 2009 at 04:02:35 PM EST
[ Parent ]
Aren't they already shifting their peg?

And is there enough data out there to tell? If they have been shifting their exchange rate, there should be a residual in the US$/€ exchange rate movement after you take out the capital movements from European companies buying up American-owned European assets (the first few years) and then keeping the profits from those assets (the last few years). Can we connect these cash flows to exchange rate movements with sufficient precision to reveal a hypothetical shift in the exchange rate due to a shift in the Chinese peg?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 28th, 2009 at 04:15:27 PM EST
[ Parent ]
Its not clear that they are shifting their peg - when they adopted the Singapore peg, it was broadly speculated that it was with a very large ratio of dollars in the currency basket, but still its not 100%, and so there will be natural fluctuations of the US$ against the Yuan at any given peg as the US$ fluctuates against the other currencies in the basket.

But since they declare neither the composition nor the peg, and do not declare when they have changed the peg, and then since the peg itself is a trading band, and then different relative composition of the non-US currency would imply different fluctuations of the yuan against the dollar as different currencies in the basket move in different directions without the peg moving at all ...

... its simply possible to move the peg and the composition in small steps frequently enough so that there is not enough data to get a good statistical test for composition and pegged rate, simultaneously.

Indeed, when Singapore originally developed it, that was the whole point - you cannot "hide" a hard peg to a single currency, leading to risks of being swamped by speculative finance if speculators come to believe your peg is unsustainably high ...

... but if people do not know the make-up of the basket you are pegging against, telling a natural shift due to changes in the underlying rates apart from a policy shift in the peg against the basket is quite tricky. Especially when the decision makers are deliberately trying to hide the policy changes in the noise.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Mon Sep 28th, 2009 at 05:35:12 PM EST
[ Parent ]
BBC NEWS | Business | China to sell yuan bonds abroad

China has announced its first sale of government bonds in yuan outside the mainland.

The government will sell 6bn yuan ($880m; £534m) of bonds in Hong Kong to "improve the international status of the yuan," the finance ministry said.

The sale is a milestone as China opens up its financial markets and promotes its currency as a world benchmark.

Earlier this year, China's central bank called for a new global reserve currency to replace the US dollar.

It's a small trial balloon rather than a declaration of war. But you don't do something like this without considering the implications for the longer term.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Sep 29th, 2009 at 10:33:13 AM EST
[ Parent ]
... convertibility of the yuan from its current halfway house was in the mini-utopia above, and here is another step along that path.

If I came into money, I'd buy these as well as Ozzie dollar bonds and EU denominated sustainable energy project bonds (if there are any for sale).


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Sep 29th, 2009 at 02:53:41 PM EST
[ Parent ]

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