Renminbi rise bodes well for FX, says SIG’s Anthony Gillham
A change in policy regarding China’s currency, the renminbi, could lead to positive implications for emerging market foreign exchange, according to Skandia Investment Group portfolio manager Anthony Gillham.
Actions by Chinese authorities suggest they are now starting to use the renimbi to control inflation – a change in the dynamic with much wider implications for investment in foreign exchange, particularly in emerging markets.
More specifically, the Chinese authorities have allowed their currency to appreciate at a faster pace against the dollar, nearly 1%, in the first two weeks of August. With the outlook for global growth under pressure, it is possible that Chinese policy makers are asking themselves whether they really want to raise interest rates further to contain inflation. Instead, why not allow the currency to do the hard work?
This is important because the authorities in other emerging markets might follow suit. In many emerging economies rising domestic inflation is an issue, in particular where inflation expectations are rising and leading to wage demands.
A country’s currency is inextricably linked to inflation. This is particularly the case for net exporters – which many emerging markets are – where allowing the currency to rise makes goods and services more expensive on the world market. This has the effect of slowing growth without the need to raise interest rates.
Were such a change in the dynamic to take hold the implications for emerging market foreign exchange would likely be very positive indeed.
Anthony Gillham is a portfolio manager at Skandia Investment Group.