China’s decision to end its currency peg could have its biggest impact in the commodity markets.
Up till now the currency has been effectively pegged to the US dollar, so it has risen for much of the past year, which has cut the cost of China’s imports (from countries like Australia) at a time when their volumes have soared.
China’s rising appetite for oil, iron ore, copper, lead, zinc and aluminium has been met by using a currency whose rising value has cut the effective landed cost.
Logically there should be no immediate change on China’s buying patterns, and it is likely the currency will continue to edge higher.
But with China’s economy slowing, the housing sector being cooled and rising labour unrest and rising wages, the currency could fall slowly over the rest of the year and into 2011.
China has told the world the currency could fall and senior officials have indicated the currency pair to watch is the US dollar/euro.
If the euro again falls, then the Yuan will be eased lower, seems to be the message.
As well there’s general impact of the overall slowing of the trade surplus, which could halve to less than $US100 billion this year.
No doubt this will be used by some nervous nellies to warn us there’s gloom and doom ahead for commodities because of the move.
In fact the ending of the tight peg could boost commodity buying over time because it will be cheaper, offsetting any impact of the slowing in Chinese economic growth.
Watching the currency markets today will be the first thing to be done.
And also keep an eye on copper prices in Shanghai, London and New York.
China is now such a large buyer of copper (and aluminium, oil and everything else), that many traders scan this market for signs of rising or weak Chinese buying for clues as to what could be happening in the economy.
Rightly or wrongly, copper has a reputation of being a forward indicator for China.
Copper prices are still under $US3 a pound and if the Yuan starts rising, could trigger renewed buying of the metal by China.
China imported less copper over April and May and there’s a feeling that could be reversed in coming months.
The decision to allow the Yuan to move more freely, could be the trigger to renewed buying activity.
The euro finished around $US1.2390 and the Aussie dollar regained the 87 USc level to end at 87.20c.
Both the euro and the Aussie ended the week with nice gains as the fear left markets and risk aversion eased.
The impact of the currency move should be seen in commodity markets.
Gold and oil finished higher on Friday as the euro finished its best week’s trading since March 2009.
Gold hit an all-time record above $US1,260 an ounce on Friday as oil edged up past $US76 a barrel and the euro finished solidly.
August gold climbed $US9.60, or 0.8%, to settle at a record $US1,258.30 an ounce, beating the record closing high of $US1,248.20 set Thursday.
The contract also set a record for intraday prices at $US1,263.70. The previous mark was $US1,254.50, set June 8.
The US dollar fell from around $US1.21 to just under $US1.24, having reached above that level earlier in the day.
The euro hovered near a three-week high against the dollar on Friday, chalking up its biggest weekly gain in over a year after European leaders said they would publish details about the health of European banks.
Gold is up nearly 15% this year.
Gold was up 2.3% last week, its fourth straight week of gains.
So far this month, prices are 3.6% higher and on track to post its third straight month of gains following May’s 2.9% and April’s 5.9% rises.
Silver followed gold higher to a four-week peak of $US19.24 an ounce. It ended around $US19.16 an ounce.
Oil prices finished higher on Friday with the July futures contract up 39 USc to settle at $US77.18 a barrel.
It was the second week of gains for oil.
Last week it finished with a solid 5% gain.
The August Brent contract in London futures fell 46 USc to settle at $US78.22 a barrel, having traded as low as $US77.25 earlier.
The August Nymex contract in New York added 39 USc to $US78.18 a barrel.
US prices fell as low as $US75.56 a barrel on Friday after a central bank adviser in China said growth is expected to slow in the next six months and that double-digit growth for the full year is unlikely.
Copper fell a third consecutive day, hitting its lowest level in one week on weaker demand prospects.
That could change from today.
