Defying all inflation speculations, how this forex currency is setting record highs!

Here's a small video that summarizes the news updates this week!

In the times when all major currencies are experiencing a decline in their value owing to inflation concerns, the Chinese Yuan is hitting a fresh 3 Years high. Owing to major speculation and arbitrage fueled demand, Yuan has reached a high of 6.39 vs USD.

Currently, the Chinese 10-year government bonds yield around 3.07% vs the US counterpart which has a lower yield of around 1.6%. The difference between the yields has ignited the flow of cash into Yuan-denominated assets and sharply strengthened the currency.

The rising currency value leaves the country's export business on the swing. Given export contributes to the majority of China's growth, the rising currency valuation makes the country exports less competitive and attractive in the global markets

After multiple verbal warnings by Chinese officials on speculative forex trading, PBOC(People's Bank Of China) took rare concrete steps this week to cool the flaming Yuan. Posting a similar move after 14 years, PBOC announced a hike of 2%(from the current 5%) in forex reserve requirements. This step would force financial institutions to hold USD and thus, in turn, increase demand and curb supply for USD. These tangible steps are expected to make currency volatile, but it would be extreme to assume that it will tap the long-term Yuan strengthening prospects.

Happy Reading!

-Shubham Agarwal (CFA L2 Candidate | Incoming MBA candidate at University of Cambridge, UK)


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