China’s currency surged to its biggest one-day gain against the US dollar in nearly five years yesterday, after Beijing’s decision at the weekend to allow more flexibility for the yuan/renminbi.
The decision also helped to send the gold price to a record high, while a number of other dollar-denominated commodities, including oil, copper and aluminium, also rose sharply.
The yuan closed yesterday at 6.7976 to the dollar, up 0.42 per cent from Friday’s close and its biggest gain since July 2005, when China announced a one-off revaluation of its currency.
At the same time, gold surged to a new peak of $1,264.90 an ounce at one point, before falling back, while copper rose by 2.5 per cent and aluminium by just under 1 per cent. Brent crude rose by $1.11 to $79.33 a barrel, before retreating to $78.76.
Analysts said that prices were being pushed higher in expectation of Chinese buyers being able to buy more commodities now that the yuan buys more dollars. If that aided American and European exporters to China, this would also be good for global growth.
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Glenn Maguire, Asia economist at Société Générale, said: “The move to depeg the yuan is a cyclically positive move that will share more of China’s growth with the rest of the world. An appreciating yuan will automatically increase the purchasing power of both China’s corporations and households.”
Julian Callow, chief European economist at Barclays Capital, said: “The move should help to maintain the positive momentum for exporters, which is a vital element for promoting European growth at a time of severe fiscal consolidation. But it is likely to be seen as a factor that could eventually put further upward pressure on commodity prices.”
China’s decision also helped to drive gains on stock markets, with the Nikkei 225 in Japan rising by 2.43 per cent and the main Shanghai Composite index in China gaining 2.9 per cent. There were similar moves across Europe: the FTSE 100 in London increased by 0.92 per cent, with mining stocks pushing higher amid hopes of increased demand for metals. Giles Watts, head of equities at the spread-betting firm City Index, said: “China’s move has helped to give investors a confidence boost that the markets are returning to normality.”
Alan Ruskin, a strategist at Royal Bank of Scotland, said, however, that China’s decision would have a less dramatic impact than many in the market assumed. He said that the yuan’s appreciation against the dollar in the coming months could be less than expected and that the move was simply a gesture ahead of the coming G20 summit this weekend — an attempt to pre-empt an expected increase in anti-China rhetoric ahead of America’s congressional mid-term elections later in the year.
Mr Ruskin added: “The economic considerations are a little less obvious. I have seen headlines suggesting these actions show Chinese confidence in the global recovery and/or the state of her export markets. Nice thought, but I very much doubt it.
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“I suspect, instead, China would have much preferred to see how the markets’ recent swoon plays itself out over many months before acting. It was surely politics not economics that dictated the timetable for these changes.”