The Euro fell to a new record low since September 2010 with 1,2469 USD at Tuesday May 29th. It is likely that volatility of the currency is increasing in the upcoming weeks. Rapid and very sudden moves have become specific for the Euro. They might be seen as indicators for political reactions as well as interventions and partly speculation. Additionally, trust might already be fading to some extend especially in Asia, South America and other non Western markets.
Some experts predict sudden devaluations up to parity to the Dollar and lower . The short-term outlook might involve such extremes as well.
The extension of the convertibility limit for the Chinese RMB from 0,5 % to 1 % in its exchange rate to the Dollar as it was announced by the Chinese Central Bank at Friday 13th of April comes with an ambivalent message. After the RMB was allowed by the regulators to appreciate up to 30 % since 2005 several decision makers in Beijing have voiced publicly that they perceive the current exchange rate to the Dollar now as ‘in balance’.
Therefore it cant be ruled out that the new and very small scaled flexibility of the exchange rate should be seen rather as a signal of denied further appreciation than as a gradual step towards full flexibility.
Observers perceive the exchange rate as a fundamental element of China’s planned economy that is also significantly depending from overall political decisions. The current power struggle within the communist party had shown that the demand for a socially balanced economic development has risen. Along with a slow down of the export industries and a critical real estate market it is unlikely that any measures will be accepted that might be perceived as negative for the domestic industries.
For the first time since a limit was set for the Swiss Franc at 1,20 CHF for 1 EURO the currency was tested by speculators by pushing the CHF under the line of 1,20 with a temporary exchange rate of 1,1992 CHF/EURO this Thursday.
It was not fully clear if the break was caused by technical reasons due to the Eastern holidays starting this Friday or if pressure has finally increased to the point it challengede the SNB limit.
Analysts in London voiced doubts if the SNB limit can be kept if the EURO will come under extended downward pressure as a consequence of the low ECB interest rates and the situation in Spain and Portugal. Spanish bonds did not meet the demand as expected in the last week.
The CHF exchange rate is still carefully observed by currency traders as it reached up to 1,008 EUR in 2010 before the SNB intervention.
Higher volatility and accelerated downward dynamics of the EURO towards the Swiss Franc has been explained by observers in the Swiss financial magazine ‘cash’ as a consequence of the current leadership crisis at the top of the Swiss National Bank.
Given the dramatic pressure on the EUR exchange rates in the recent days and weeks there is growing evidence for a new test of the CHF limit set by the Swiss National Bank at 1,20 CHF for 1 EUR last year.
The volume invested by the SNB to keep this limit is not public but estimates are dramatically high.
In case market speculation pushed the CHF lower than the defence line of 1,20 a much broader challenge of the limit is expected.
The Chinese administration has announced a further ‘liberalisation’ of the RMB exchange markets by providing the permission to foreign RMB investors to invest in Chinese companies. Since foreign investors got the chance to aquire Chinese RMB by trade deals and by launching bonds in Hong Kong it became a problem for them to re-invest the money. By the new regulation foreign investors now have got the chance to re-invest the RMB capital in Chinese companies.
The new regulation continues the market policies of the Chinese government supporting free trade mainly in legislative corridors to benefit Chinese companies or Chinese state institutions holding majority shares in key industries. This accumulation strategy does not follow WTO rules but might create long term disadvantages for international investors, trade partners and industries.