The yuan forwards rose 0.2% last night, reflecting a bet that the currency will rise 2.3% over the next year, and although modest in absolute terms, nevertheless, it is the first such rise since China pegged its currency to the dollar as a result of its anti-crisis policy in July of 2008. According to El-Erian of PIMCO, this could lead to as much as a fifteen percent appreciation over the dollar in the next few years (the yuan appreciated twenty-one percent in the three years prior to July of 2008). I believe the implications could be significant:
- It should help to relieve inflationary fears and allow China to refocus on growth and basic material consumption.
- A strong yuan would also benefit other emerging market countries whose primary export partner is China.
- Most EM sovereign debt would appreciate as their currencies would rise along side the yuan.
I may be getting ahead of myself, but I think this is a positive trend worth following.