China’s Rising Remimbi To Spur Continued Rise of the Peso

``When everybody knows that something is so, it means that nobody knows nothin’.” Andrew S. Grove, co-founder of Intel

Meanwhile the Philippine Peso which appreciated by about 18.77% in 2007 for its biggest annual gain and the best performer in Asia for 2007 (economictimes.indiatimes.com), should be expected to remain strong in line with other Asian currencies, albeit at a much subdued pace compared to 2007.

China’s rising inflation and geopolitical pressures latched on growing “protectionist sentiment” in the US may prompt Chinese authorities to accelerate the pace of appreciation or conduct a huge one off revaluation vis-à-vis the US dollar.

Since the brunt of the global currency adjustments have been through the western managed free floats, Asian currencies, which had in the past maintained a mercantilist regime by subsidizing exports through currency manipulation and supporting US assets via investing its surpluses to US treasuries or other US assets known as the informal Bretton Woods 2, remain highly undervalued. Besides the continuation of a massive buildup of foreign reserves and strong capital flows are expected to remain vibrant. This runs under the assumption that the US economy and its financial markets won’t do a spectacular swan dive or the world won’t succumb to deflationary pressures.

As for the US dollar index, sentiment has been excessively against the US dollar such that Brazilian super model Gisele Bundchen, rapper Jay-Z and India’s tourist spots have eschewed the US dollar for other currencies for their revenues.

Meanwhile, a recession in the US which percolates to a slowdown elsewhere in the world is likely to prompt for monetary policies targeted on growth revival than inflation control, and thus, rate cut measures in offing for the Euro zone or in Canada or UK which means a stronger US dollar index for 2008 (most especially if the US capitulates to deflationary forces).

On the other hand, the Japanese Yen is likely to resume its uptrend as global markets remain under pressure as the carry trade unwinds (so with the Swiss Franc).

Nonetheless, as a side comment, talking of belated political reactions, the Philippine government recently responded to declining income from OFWs as a consequence of the rising Peso via the introduction of hedging facilities (pia.gov.ph). This is a clear example of government’s reactive nature. By liberalizing the markets, private initiatives would have addressed the issue earlier and have competed to provide the best programs for the benefit of OFWs, exporters and those affected by the rising Peso.