In yesterday's Wall Street Journal exchange with Nouriel Roubini, I noted this uncertainty:
It is worthwhile to note that we have very little knowledge at this point about what this new regime actually amounts to, other than a small appreciation in the current exchange rate. The range of the "float" is essentially the same range that was, at least hypothetically, in operation prior to today's announcement. It may well be the case that the peg will be managed less severely now, but plus or minus 0.3 percentage points is still a pretty narrow corridor.
To that point, we have this report from this morning's Financial Times:
The newly revalued Chinese renminbi weakened marginally against the US dollar on Friday, hinting that Beijing does not intend to use the flexibility built into its new currency regime to allow the renminbi to creep higher...
... on Friday the renminbi was kept on a very tight leash, closing a fraction lower at Rmb8.1111 having at no point strengthened past the Rmb8.11 barrier.
“We expect a tightly managed regime with only very gradual appreciation over time,” said Derek Halpenny, senior currency economist at Bank of Tokyo-Mitsubishi.
This encouraged a minor sell-off in the yen, which rose sharply on Thursday on news of the revaluation. The yen, the most liquid Asian currency, slipped Y0.6 to Y110.88 against the dollar, Y0.7 to Y134.90 against the euro and Y0.7 to Y194.24 versus sterling...
Elsewhere currencies traded in tight ranges, with the US dollar holding steady at $1.2153 against the euro despite speculation that China’s move could lead to less Asian demand for US Treasuries.
To me, this makes a lot of sense. As I have often suggested, the large U.S. trade deficit with China gives us scant information about the fundamental value of the nominal exchange. The trade deficit is a function of the real exchange rate, which conceptually can be consistent with any level of the nominal exchange rate. The real exchange rate, in turn, is dependent upon a whole array of factors, from underlying considerations of comparative advantage to the complex web of government trade policies. It looks to me like the Chinese have decided to slowly hunt their way to the level of the exchange rate that will stick. At a measured pace, so to speak.