WHOA...
This weekend and just before the latest "G-20" summit China announced that the YUAN was not going to be pegged to the dollar any longer. Markets reacted this morning and then relaxed throughout the day.
Why is this a big deal?
When the value of the YUAN was "pegged" to the dollar (unofficially) for the last 2 years or so...the value of the YUAN would go UP or DOWN in tandem with the value of the US dollar. This meant that even when the US dollar was DOWN vs. other worldwide currency, our dollar was still was able to purchase the same amount of goods and services when converted into the YUAN. Additionally when the value of the dollar (and yuan) was down vs. other currency: the OTHER CURRENCY could BUY MORE goods and services from CHINA. Sound confusing?
With the increase in EXPORTS (due to the "artificially" weaker yuan since it was pegged to the weaker US dollar), China's currency SHOULD have had an increase in value. The move to peg the yuan with the US dollar actually had a positive effect on China's cash position because the US and the rest of the world still found extremely cost effective goods there with the excellent exchange rates while the US dollar was weaker. Fortunately for the US: they have been spending that money here in buying treasury notes.
If the YUAN is MORE valuable than the dollar: China's holdings in US dollars (Nearly 825 billion dollars worth) are WORTH less when converted into their currency. They can then BUY more t-notes with less of their money...or they will discontinue their practice of massive purchasing of our debt. If China becomes a net seller of our bonds or sells more than they buy: we could be in trouble.
Either one of those actions can have effects on our Mortgage interest rate market.
The good news: as of yet there is not a better place to park money than in the US.
"Unpegging" the yuan hasn't had an effect yet. They just announced that they would do that. The value of the Yuan vs. the dollar actually hasn't changed yet.
The other side:
A stronger YUAN opens up a HUGE market for consumers looking to purchase goods and services from other countries. The people of India stand to gain much if China's currency picks up strength and all of the sudden millions of "middle class" are interested in imported goods. This is why the knee jerk in the DOW this morning (triple digit gains) and when reality set in that this will be over some time: values recovered (Dow was off 8 points at the bell.)
The FNMA 4.0% bond was DOWN 30 basis points early in the session on this news as investors put money into stocks...but closed out the day UP 16 basis points as investors shook off the pixie dust and put their money back into the safety of the bonds.
--
Chad Schauers
Montana Mortgage Lender, Bozeman, Montana
Personal Cell: 406 799 8613
Personal Email: metchad@gmail.com
