Renminbi Falls vs. USD

The Chinese Yuan just closed August down for the month. A straw in the wind of Dollar strength...?

THERE'S ALWAYS a lot of book squaring by financial traders ahead of a long holiday weekend, writes Brad Zigler of Hard Assets Investor.

   But last week saw strong sentiment on foreign currency desks to push the Chinese Renminbi (also known as the Yuan) to its first monthly loss since the US Dollar peg was dropped in July 2005.

   The Chinese currency – now worth 20% more vs. the Dollar than three years ago – dodged a bullet in July '08, going into the month worth 14.59¢...peaking at 14.70¢...and then sliding into August at 14.66¢.

   The Renminbi dipped to 14.57¢ on August 19. It ended the month just lower from the start, closing at 14.63¢ from 14.62¢.

   Whether this is just a "bump in the road" – as some think – or a symptom of capitulation to inflation, remains to be seen.

   China's growth, of course, has been a driver of the global commodities boom. Weakening Chinese demand loosens a big part of the commodity cycle's underpinnings.

   Let's take a quick tally of the damage...

• The Chinese producer price index hit 10% in July, its twelfth consecutive monthly rise, to attain a level not seen in a dozen years;
• Rising energy and commodity prices have ratcheted up costs in the Chinese supply chain so much that analysts are now talking about a 2% decline in the GDP growth rate from the 10% level clocked in the first half of '08. And China's not alone in that. GDP growth in that other engine of demand, India, declined to 8% at last look;
• The inflow of US Dollars into Chinese coffers is also slowing. According to the most recent government statistics, China's trade surplus totaled $123.7 billion in the first seven months of 2008, a 9% drop from year-ago levels.

   No doubt, China's still growing, but its resolve on the inflation-fighting front is now being tested. A stronger Yuan would certainly help to hem in the inflationary beast. In this Dollar-resurgent world, however, that will be more difficult than it once was.