The market is thrilled as China announced to increase flexibility in RMB movement over the weekend. Investors believe this will increase purchasing power in China and benefit commodities and products exported to China. Currently trading at 78.4, WTI crude oil price rallies extends Friday's rally and rises to the highest level in 6 weeks. Brent crude also approaches 80 as driven by the news. USD slides as RMB is prone to rise and this helps maintain gold's strength. The yellow metal remains firm after hitting a new record high last Friday.
The People's Bank of China published a statement called 'Further Reform the RMB Exchange Rate Regime and Enhance the RMB Exchange Rate Flexibility' on Saturday and stated 'recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability. It is desirable to proceed further with reform of the RMB exchange rate regime and increase the RMB exchange rate flexibility'. The announcement a week before the G-20 meeting is viewed as a tactic to avoid pressure from the US during the meeting later this week. In the near-term, the risk of trade tensions between China and the US would be reduced
The announcement indicates the end of RMB's 2-year peg to the dollar. The government said that there would be no one-off appreciation and the trading band would remain at +/-0.5%. The most likely form of 'flexibility' is that RMB will be linked to a basket of currencies. Indeed, significant appreciation against USD is not likely.
Though the movement will be gradual, the market is excited and expects increase purchasing power will lead to higher imports of commodities. However, there's no solid evidence of the relationship between RMB appreciation and Chinese imports. Strength in commodity prices is mainly driven by sentiment.
Yet in the long-term, the reform should help shifting China's reliance economic growth on exports to domestic consumption.
Commitments of Traders:
Crude Oil: Net speculative long positions almost doubled to 32930 in the week ended June 15 as contraction in shorts outweighed that in longs. Risk appetite returned during the week as strong macroeconomic data indicated growth remained intact despite sovereign crisis in the Eurozone. Net longs are expected to soar further in the coming week as potential appreciation in RMB should attract buying in commodities.
Natural Gas: Net speculative short positions dipped further and gas price surged above $5 during the week. Increase in cooling demand, abnormal hurricane season and drilling ban in the Gulf of Mexico raised worries over demand/supply balance.
Gold: Net speculative long positions rose for a third consecutive week on safe-haven buying. Consolidation in gold did not drive traders away. Instead, it attracted buying. Persisting concerns over deficit problems and decline in USD due to RMB appreciation should buoy gold further.
Silver: Net speculative long positions added more than +2K to 37.5K last week. Yet, current level remained well-below the peak. Silver possess both industrial characteristics and safe-haven characteristics. However, over the past few months, the industrial characteristics dominated and weighed on silver price. This made the metal 'cheap' relative to gold.
Platinum: Net speculative long positions edged higher to 15.8K last week. Similar to silver, platinum's industrial characteristics pressured price over the past few month and drove away demand. Another reason is profit-taking as platinum price surged drastically in the first 4 months of the year.