In a move to promote two traffic in the underlying Chinese yuan, government officials signed a memorandum of understanding that is set to take effect July 5th. In the memorandum, domestic investors, along with brokerages, will be allowed to invest and trade in 33 markets including the US, Hong Kong and Japan. Subsequently, it also allows for investment in emerging markets like Vietnam and Nigeria. The decision, historically significant, was ultimately expected after previous plans to allow investment flows outside of the country failed. Earlier, government officials, hoping to restrain the overheating demand for the local currency, implemented a restrictive quota on the purchase of foreign fixed income products through the qualified domestic institutional investors plan. Under the plan aptly named QDII, government restrictions were relaxed, allowing banks to place money overseas. However, it was tepidly received by the market. Incidentally, expectations are comparatively higher for this plan to succeed as it places no quotas or restrictions on the amount of money funds can invest outside the country.



More Patience Is Needed on Yuan Flexibility
The Chinese yuan pared back slightly as comments by central bank Deputy Governor Wu Xiaoling indicated that officials are continuously seeking to stabilize the local currency. Speaking at a Beijing forum, Wu also stated that global partners must be “patient” over the gradual appreciation in the currency as officials continue to contend with “structural problems”. The comments come a day after US Treasury Secretary Henry Paulson vowed to be more “creative” with officials in formulating a flexible exchange rate regime. As a result, with officials reaffirming their steadfast below in a slow but gradual approach, market participants pared yuan trades back a bit, currently trading at 7.6219 in New York.

Hong Kong Unemployment Rate Unchanged
As expected, the unemployment rate remained unchanged at 4.3 percent for quarter. According to the report, unemployment remained supported in the three months as labor additions were seen in major sectors of the economy. Total employment increased by approximately 14,000 to 3,476,000. Subsequently, the underlying HKD was boosted higher as speculation is looking in the direction of higher levels of consumer spending on a tighter labor market.

Asian Markets Continue Record Advance
Regional markets in major Asian economies continued to advance on the day with equities in China, Singapore and Hong Kong on the bid side of things. In China, stocks rose after it was revealed that a majority of households in the mainland prefer equity investments to bank deposits. The notion isn’t unwarranted as bank deposits in China lag far behind the pace of inflation, currently accelerating at a 3.1 percent clip. Subsequently, of the 20,000 households surveyed by the country’s central bank, almost half of the participants claimed to prefer stock trading over mutual funds. As a result the CSI 300 Index was supported by the news, rising 39.68 points or 1 percent to close higher at 4,197.28. The optimism had spillover effects in Hong Kong as the benchmark Hang Seng index added an impressive 270 points to close at 21,954.67. Rising for the fourth straight record close, the stock index has added 5.4 percent in the previous four sessions as HK$95.9 billion worth in equities exchanged hands in the day. Leading the overall market higher were investments in mainland brokerages, with China Mobile Ltd. adding gains. As a result, the improved sentiment helped to boost the Hong Kong dollar in the overnight, currently trading at 7.8119. Singapore’s market was boosted to a record close as well, adding 10.82 points to close at 3,639.49.

Richard Lee is a Currency Strategist at FXCM.