Hi,Just read the news and wonder (1) why US treasury and UK Gilts prices fell when China had revalued its currency against the US dollar, and (2) why Eurozone bonds may benefit in the longer-term because the new basket of currencies contain the euro.Please advise. Thank you very muchBeginner

In order to maintain the CNYUSD peg at the old level, the chinese had to purchase huge amounts of US securities, namely government bonds. This revaluation means the chinese have to purchase less treasuries, so yields rose. In regards to eurozone bonds, the chinese are never going to allow a complete freefloat, and as such will still need to purchase assets of the countries against which CNY is pegged, so the bonds yields may fall.(I am not saying this will happen, but this is the rationale behind the 2 points you raise)

Nicely said, David.

thanks David....but wonder why China has to buy the government bonds whose currencies Yuan is pegged tosorry for simple question

when a currency is free floating then the equillibrium of buyers matching against sellers decides the price.if a currency is pegged then the equillibrium is maitained by the govt (central bank). so a person buying yuan and selling dollars could end up doing it (indircetly) with the central bank. if there is more demand for the yuan then the central bank ends up being net long dollars. they don't just keep these in cash but buy treasuries.

thank you very much

just A THOUGHT,..after yuan reval,some currencies went reval too...what is the justification behind this ...why should a change in peg should reval the float ones..malayasia should reval..because it is pegged..take for example..rupee..appreciated by more than 1% at one time..but then after lot of players lost lot of money..it was back to square one..same price against dollars..a fight between yuan vs dollar should help the others who are strong currencies...like euro,gpb,yen( most likely currencies to be bought to create the basket or maintain the new structure. Why remote currencies should appreciate against dollar..may be i am wrong...

The relative export competitiveness of the Asian currenices vis-a-vis China improved (marginally)after the revaluation of the yuan. Hence the increase in demand for these currencies. Also, the markets expect the yuan to gain further, and the subsequent appreciation of the Asian currencies reflected this sentiment.As for the Indian Rupee, falling back to its pre-revluation level on Friday, the move was largely due to intervention by the central bank.

QuoteOriginally posted by: davidh96In order to maintain the CNYUSD peg at the old level, the chinese had to purchase huge amounts of US securities, ... or printing more and more yuan

It wouldn't be a case of buying USD securities or printing more Yuan. The Govt exchanges Yuan for USD. It’s just that whenever they receive USD for their Yuan then they buy US securities with the USD (it doesn’t really matter where the Yuan came from as long as it stayed undervalued).The government wouldn't want to flood the market with too many new Yuan. The main reasons are due to inflation and the devaluation of the Yuan (both intrinsically linked).Think about the reverse: What would happen if the Yuan was over valued and everyone was trying to sell Yuan to the Govt/central bank. What happened to the UK with the ERM in 1992?

I don't agree with the export competitiveness argument. If Chinese players innovate and be more competetive then they will still keep on exporting at a better price. The economy will do well and there will be still room for Renminbi reval. Should we believe that rest of the Asian currencies will gain from China's competetiveness? The indian rupee, what I gathered gained from massive buying by the stste run OIL companies. The Dubai crude is steadily going up. There is a need for more dollar to buy the same amount of oil. What happens to other Asian countries's economy is to be seen.

great article today in the NY Sun about China's re-evaluation - effectively - China now has a stronger currency -this will1) hardly affect its exports, 2) allow Chinese companies to compete more aggresively for the aquisition of foreign companies