Surprising the market, the Chinese yuan gained to a record high since the revaluation to 7.5576 against the US dollar in the overnight. The first time below the 7.6000 figure, the yuan also gained notably against the Euro and British sterling as further speculation emerged over the possibility of a flexible exchange rate regime in the near term. Although policy makers have noted in the past that appreciation remains an option in the longer term perspective, some in the market are banking on a preemptive move as growth continues to accelerate at an alarming pace. Incidentally, comments from a top planning agency in China helped to support the gain in the yuan as officials noted prevention of an “overheating” economy as the top priority in the second half of the year. According to the National Development and Reform Commission in Beijing, the government “will apply economic and legal policy tools to cool the growth pace in the economy”.

Paulson Set For Impromptu Trip To China
US Treasury Secretary Henry Paulson announced that he will travel to China at the end of the week, hoping to further discuss matters of trade and currency policy. Although relatively expected by the market, the trip is on short notice and comes within days of a legislative draft by Congress. With several bills already pending, the US Senate Finance Committee is said to begin furthering legislation later this week, intent on turning up the heat on Chinese officials. In line with political measures in the past, US politicians continue to argue for a more flexible currency regime as it was recently revealed that China’s trade surplus once again smashed records. “This trip is part of an ongoing process to strengthen our strategic economic relationship – to address long term issues such as working with China to rebalance its growth and increase the flexibility of its currency”, Paulson said in a statement.

Singapore Monetary Authority Keeps Policy Stance
Singapore’s monetary authority, the MAS, released statements during the overnight session that were in line with market expectations regarding further approaches with the Sing dollar. On inflation, officials stated that domestic price increases remain tame despite rising property prices and will continue to remain the governing body’s pivotal concern. With “the impact of the rise in property prices to CPI during the first round is small”, commented MAS Managing Director Heng Swee Keat. As a result, “we will watch the impact for second round as higher rental costs get passed on to prices of goods and services.” On the topic of future risks other than domestic property prices, Heng noted that “the outlook is positive. Nevertheless, we continue to remain vigilant in the face of a number of risks. These include upside surprises to inflation, weaker than expected growth in the US…and potential heightening of geopolitical tensions around the world.” With the government estimating full year growth in the area of 5-7 percent, the MAS continues to maintain its policy of a “modest and gradual” appreciation in the underlying currency. However, traders were taken back a bit in the overnight with the Singapore dollar falling to the US greenback, trading at 1.5093.

Regional Markets Down On The Day
Stock markets in both Hong Kong and Singapore declined on the day as profit taking took both indexes from record closes. The Hang Seng index dropped for the first time in five sessions, closing down 110.70 points at 23,362.18. Comparatively, the Straits Times index declined on US subprime concerns. As a result, the benchmark closed down 0.7 percent to 3,628.81.

Richard Lee is a Currency Strategist at FXCM.