Yuan Me, Kid, We're Gonna Be Flexible


"Copper prices moved up the most in a month."

China's weekend announcement that it would give the yuan greater 'flexibility' quickly became the dominant financial news item and driver of many a market value. Certainly, that was with Asian currencies and equities, as well as U.S. Treasuries and certain base metals. We just did. Copper prices moved up by their daily 5% limit in Shanghai—the most in a month.

. . .There is, of course, another side to the Chinese coin at this juncture. If investors continue to view the yuan's 'flexibility' move through the prism of economic recovery, then gold's safe-haven theme may take a back seat to risk appetite (for other commodities and assets).

The statement from Beijing came less than a week before G20 leaders meet in Toronto and represents a departure from a 23-month period when Chinese currency was effectively pegged to the dollar. Days ago, China warned that the yuan's exchange rate was not to be discussed at the G20 summit.

The focus at that round table is, of course, expected to be the European debt issue. As Bloomberg's William Pesek puts it, "Those much-coveted AAA credit ratings mean less with every passing day as the biggest economies issue more and more IOUs. It would be a crime if the G20 left Toronto without exploring how to restore trust." Meanwhile, the euro quietly slipped higher (1.24) but gold appeared to be taking cues from elsewhere last night. The dollar was last seen at near 85.50 on the trade-weighted index.

The PBoC stated in recent months that the pegged exchange rate was in fact one of the "anti-crisis policies" introduced in 2008 in order to help support the economic recovery, and thus, such an 'accommodation' would eventually end up being removed. In that sense, none of what took place on Saturday should come as a shock to anyone.

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