All clear on the RMB front

Yes, a deal has been stuck.

Hu Jintao is going to attend the April 12 nuclear summit. So there’s no way no way that China will be named a currency manipulator a mere 3 days later. But a sudden change of heart by China to soften the peg is very likely afterward. Like I said yesterday, China could appease by simply broaden the trading band, which may not result in any appreciation at all given its trade deficit.

Currency rhetoric cools off

Amazing! It seems that the sino-american brinkmanship is playing out again, for the umpteenth time!

Rhetoric seems to be cooling off on both sides. The 3 freshly minted members of China’s Monetary Policy Committee, a key government advisory on…monetary policy, are voicing  pro currency adjustment opinion in the public. The US report on trade barriers focus on stuff other than the exchange rate. China is signaling more willingness to join the chorus on Iran. So, maybe, a backroom deal has already been reached.

Given China’s trade deficit in March, maybe the government feels more at eased at widening the RMB trading-band as the immediate adjustment will be minimal, that is, if you buy SocGen’s view that China’s trade deficit is at least a medium term phenomenon. So effectively China can promise moving from a hard peg to a soft one, while making minimal change in reality. The RMB might even depreciate if called for, to scare off any hot money inflow betting on an appreciation. This way China regains some level of monetary independence and can choke off imported inflation if needed. And Team Obama get to tell Americans in November how they stared big bad China in the eyes and didn’t blink.

If this plays out, I think it will happen in Q2 indeed, so that hopefully the whole thing will blow over by baby-kissing time. The attendance list of the Mar 12th summit’s still worth watching for confirmation though.