Yen Awaits US Senators, Sterling Braces for Minutes Surprise

4:30 am UK Minutes of Bank of England Interest Rate Decision (exp 8-1, prev 8-1%) 5:00 am E-12 Jan Trade Balance (exp EUR -1.4 bln, prev EUR -0.9 bln) 6:50 pm JPN Feb Trade Balance (exp Yen 1.62 bln, prev Yen 351 bln)

Yen watchers are staying alert to the incoming days’ developments surrounding the US Senators Graham and Schumer’s visit to China to examine Beijing’s progress in instilling currency reform, namely, a revaluation in the yuan against the dollar. The Senators have called a March 31 deadline on China before scheduling a vote in the Senate on whether to levy a 27.5% tariff on Chinese imports in the event that Beijing does not move in the currency issue. But China is already speaking back. Chinese premier Wen Jiabao said in late Monday evening to a forum of foreign business executives that Beijing would adopt new initiatives on issues such as intellectual property rights violation, but : “it is unfair for the US to scapegoat China for the US’s own structural economic problems.”.

We think that a 1.7%-2.1% revaluation may already be in the works, and would be announced sometime next month, around the visit of President Hu’s to Washington as well as the release of the Treasury report on foreign exchange. Such a decision will not only temper pressure from Washington, and particularly US lawmakers, but would also avoid any unwanted diplomatic strains during President Hu’s visit. In the event that a revaluation is announced, we would expect about a 2% gain in the yen versus the dollar and the euro and a modest rally in the commodity currencies of CAD and AUD against the dollar. Should such an announcement take place at a time of weak US data releases, then it could trigger a more lasting weakness in the dollar.



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