I have this feeling that the Chinese are rattled at the moment. Fridays 8.1% GDP (or 6.9% according to Professor Roubini) seems to have them thinking. So this announcement of a widening of the trading range for the Rmb is very interesting. It effectively doubles the range to 1% of the peg and in a way is a white flag to the market.The external inflation shocks from (for example) the crude oil price rises need capping. If you're China you either go to war or you let your currency rise to absorb some of the hit. The problem with the stroger currency is that you may just snuff out demand growth for your exports. Its a fine balancing act and I just can't see it ending well.
|Check out the brain|
I note the Op-Ed piece from Pimco's Mohamed El-Erian regarding what a rise in volatility is telling us. I honestly don't think you need a brain the size of Mr. El-Erian's to understand that the market was being kept buoyant and in place by QE. Remove this and the average equity punter starts to reconsider valuations. The conflict now is between the QE addicted and the bears. MS says that there's only a 33% chance (down from 66%) that we'll get QE3 in June. GS believes its better than 50/50.