The Chinese yuan gained 0.11 percent, to close at 7.6047, its highest close since 2005, on speculation that China is letting the yuan appreciating to gain more control over price pressures. Along with a widening trade surplus and rising investment from overseas, which boost currency inflows, money supply is escalating almost twice as fast as the overall economy. The PBOC needs to take stronger action to drain liquidity from the system and the Chinese monetary authorities should welcome more yuan appreciation in the weeks ahead. In fact, one year yuan non-deliverable-forwards traded at 7.2539 to the dollar, anticipating the yuan could be almost 5 percent stronger in one year's time. However, China may suffer from exchange rate losses when products exported to other nations start bearing more expensive price labels. The Chinese yuan has appreciated 8.8 percent since dropping its fixed exchange rate with the United States in July 2005.



Mainland China equities ease as investigators uncover regulations breach

Today, the benchmark Shanghai Composite Index closed up 15 points or 0.41 percent at 3’836.29. However, the Hang Seng Index shed 0.8 percent reaching the bell at 21772.73. Citing an overvaluation of Chinese banking shares, the sector laggards of ICBC and China Merchants Bank dragged the index down 0.9 and 0.2 percent respectively. China’s auditors released a finding involving regulation irregularities in three of China’s seven largest banking intuitions mounting to 15.6 billion yuan. Lending some support to the easing shares was Hong Kong Exchanges $ Clearing Ltd. The market operator was buoyed by a Citigroup upgrade in price target for the stock by 26 percent, sending the exchange’s shares to an all-time high of HK$110.50 (+1.5 percent).

Straits Times Index gains as Singapore home prices reach a 10-year high

The Singapore benchmark equity index climbed 0.1 percent to close at 3552.33 on speculation of strong earnings on the banking sector. United Overseas was the biggest winner of the session as the nation’s second largest bank lent 0.9 percent to the equity complex closing at S$22.20. Singapore’s private home prices gained 7.9 percent in the three months to June 30th, the highest in ten years.

Richard Lee is a Currency Strategist at FXCM.