Currency News: China’s Yuan Joins IMF Currency Reserves & New Zealand Seeks To Devalue Currency
Currency News
IMF Accepts Yuan Into SDR Showing Confidence In Yuan Stability
The IMF has recently announced that they will be accepting China’s yuan, into its basket of currency reserves, called the Special Drawing Rights (SDR), thus increasing its validation as a reliably strong currency alongside the dollar, euro, pound, and yen. In 2010, the IMF had rejected China’s request to enter their reserve basket, as reports had shown not currency not being stable enough and being able to move freely without much government interference. Since then, the government has allowed a greater access to its bond market, made the yuan fixing more market-based, and has attempted to close the between currency rates at home and abroad.
Of course, China still is not on par with the USD and other major currencies, but this elevation will indeed help China’s slowing economy as central banks and fund managers around the world will begin purchasing more Chinese assets, thus creating about a $trillion dollar inflow into the Chinese economy. China’s economy is already becoming more of a consumer and service industry based economy, and this inflow will greatly help its people to be able to purchase more imports and other consumer products domestically as well. However, they still only represent 2.4% of all payments by value, while being the world’s largest trading nation.
Investors are still uncertain of whether China’s yuan will continue to become more freely traded, with less government currency manipulation, since revelations were revealed in August of 2015 that the government was manipulating economic figures, to avoid devaluation in the currency. Therefore, the biggest roadblock for China, from becoming a major currency reserve for the world, is internal, not external. The reason is because there is a huge positive outflow of the yuan, exceeding $50 billion dollars a month by Chinese citizens, to increase their own dollar savings abroad. This causes the People’s Bank of China to consistently have bought large sums of dollars to keep the yuan stable, since if the currency devalues too quickly it will cause an endless cycle of Chinese citizens sending more money abroad. Furthermore, if any currency depreciates rapidly it can cause a run on the bank(s) in China, as people will lose confidence in the monetary system, causing huge economic crises creating an even more negative snowball effect on China.
New Zealand Central Bank Seeks To Devalue Exchange Rate Level
Although many countries today are worried about over devaluation in their domestic currency, New Zealand is actually worried about overly strong currency, the kiwi, or New Zealand dollar. The Reserve Bank of New Zealand (RBNZ), has been pressured recently to lower the exchange rate, as the country’s exporters and manufacturers have been negatively impacted by the ‘strong-flying’ currency. The central bank has been trying to curb inflation for some time now, as well as help increase export revenues. Currently, the central bank has maintained interest rate levels, still maintaining a position for rate cuts over the next few months. The easiest position for the bank would clearly be to cut interest rates, as it would it would lower import levels through capital outflow, lower the currency level. However, the housing market is already over-performing, with prices high. The central bank is as well scared to overheat the economy but slashing interest rates, as prices have been rising yet, i.e. with dairy products, and further rate cuts would simply cause the economy to accelerate performance levels.
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