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Prospects daily: China ends yuan peg to dollar; emerging market equities rally

Global Macroeconomics Team's picture

Important developments today:

1.  Global equities remain robust on China’s yuan impact



Global equities remain robust on China’s yuan impact. World stock markets advanced for a 10th day on Monday following China’s announcement to relax the yuan’s fixed rate to the dollar. The People’s bank of China signaled over the weekend that it is ending the 6.83 yuan peg to the dollar which was adopted during the global crisis to protect domestic exporters. The surprise move was welcomed by investors and suggests that policy makers expect the global economic recovery to strengthen.

Overall, the benchmark MSCI World Index extended its longest rally to 11 months with shares across Asia and Europe climbing. Notably, emerging-market stocks advanced 2.4%, heading for the longest rally since September 2005. The surge in U.S. stock futures also suggests that U.S. equities may rise for a third day. Meanwhile, U.S. treasuries slid for second day as stocks gained momentum after China’s adoption of a more relaxed exchange-rate regime, reducing demand for safe-haven assets.


Among emerging markets:

In East Asia and Pacific, China’s central bank ended a two-year yuan peg to the dollar ahead of the G20 summit that is scheduled to begin in Toronto at the end of this week, allowing the yuan to appreciate 0.42% against the dollar so far, from 6.83 to 6.79 yuan per dollar. A stronger yuan is expected to help curb inflation in the Chinese economy and allow domestic demand for imports to expand, although the appreciation is expected to be very gradual.

In Central and Eastern Europe and the CIS, Hungary’s central bank left the benchmark two-week deposit rate unchanged at 5.25% today, after raising its inflation forecast to 4.9% for 2010 (up from 4.4%) and to 3% for 2011 (up from 2.3%).

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