China Raising Rates: Good for Yuan and All

 |  Includes: CAF, CNY, CYB, FXY, GXC, PGJ
by: Douglas Borthwick

There is considerable discussion over whether China will raise rates on Friday. These rumors are contributing to market anxiety regarding risk positions. We note that after China's move to flexibility in 2005, China waited some time and then began raising rates. The raising of rates by China was a speed changer for USD/CNY. After raising rates the USD/CNY began dropping at a faster clip, taking the USD/Index with it.

The chart below speaks for itself (click to enlarge). At the end of April, 2006, Chinese rates began to rise. The rising of rates in China sped up yuan appreciation, causing a faster move lower in the USD/Index. We understand rate rises in China should not be looked at as a sign of slowing ahead, but rather as a signal that China is serious about strengthening the yuan.

China 12M Lending Rates, USD/CNY and the USD/IndexClick to enlarge

Disclosure: No positions