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Forex Flash: USD/CNY fixing fell to a fresh low yesterday - DBS Group

FXstreet.com (Barcelona) - DBS Group analysts note that the USD/CNY fixing fell to a fresh record low of 6.2408 yesterday and another period of substantial Yuan appreciation appears to be underway.

They see this as good news for Asia, as it mitigates the risk of a sudden reversal of capital flows. They cite this as becoming the major risk factor for the global recovery, explaining that as capital outflows would put pressure on currencies, banking system liquidity and rates,they have the potential to take a lot of wind out of the sails of the global recovery. They write, “Especially at the current juncture, after a weakening in the data flow out of China and the US and a sharp move lower in the price of gold, a lower USD/CNY is important to alleviate the fear of a strong dollar in Asia and a sharp rise in interest rates.

That said, they note that as many Asian emerging market economies tightly manage their exchange rates, a more worrisome outlook for capital flows will oblige them to slow the growth in domestic private demand and pay more attention to cost competitiveness relative to their trading partners. They write, “The more uncertain the outlook for capital flows and domestic liquidity, the more likely is a transition to a tighter monetary policy regime. With this, current flattening trends are temporary and steepening trends should resume soon. Interest risk remains a factor in rates markets. In fact, it is growing more important.”

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