Archived IMT (2010.06.21)

CHINESE BABY STEPS wikk likely be the way of any yuan strengthening against USD after Beijing announced more flexibility in their FX peg regime. China allowed the yuan to rise 0.43% on Monday, which is close to the maximum daily permissible fluctuation of 0.5%. China could allow more of such increases ahead of this week's G20 meeting (such as three daily gains of 0.3%-0.5%) to achieve 2.30-2.50% increase. But the more relevant matter is that currency tightening is unlikely to prove as effective as monetary policy tightening (interest rate hikes and higher reserve requirements) to stem the +3% annual CPI. We noted in prev IMT that world stocks and Asian FX will be boosted on hopes of higher Chinese demand but will these gains hold into the rest of week. As markets await to see whether Chinals FX announcement was mereley political posturing ahead of the G20, they will want to recall that US stocks have mostly declined during the week after June expiration ie next week. EURUSD to test $1.2270 as tensions remain with French banks. In the WorldCup, LatAm nations remain the biggest winners following Chile's 1-0 victory vs. Switzerland. Spain's modest 1-0 win over Honduras may not prevent the group from turning into the battle over goal difference, while Portugal's 7-0 win over KoreaDPR could mean that Brazil will play Spain in the 1/16 round.