On Inflation And Recovery
Yesterday, the Australian and New Zealand dollars traded near the highest level in 10 months after Reserve Bank of Australia Governor Glenn Stevens said he will have to raise interest rates at some stage as the economy recovers. This is to guard against inflation.
Elsewhere, global fund managers are betting China will let the yuan strengthen for the first time in more than a year to keep inflation at bay following a flood of foreign capital and record lending. New loans in China almost tripled to $1.1 trillion this year, contributing to a 60% surge in property sales. A US$585 billion stimulus plan helped July’s retail sales rise 15.2% from 2008. Reserves swelled to US$2.1 trillion on June 30 after a record quarterly jump as overseas investments led China to sell yuan to hold it down. The Shanghai Composite Index, Asia’s second-best performer this year with a gain of 72%, is in “bubble territory”.
The predicted appreciation in Yuan pale alongside six-month rallies of 18% and 14% for the Indonesian rupiah and the Korean won.
All these bodes well for Asian currencies and fund inflows. Asian stocks rose after the U.S. Federal Reserve said the recession is easing and pledged to keep interest rates low.
U.S. Federal Reserve statement on Wednesday provided 3 points which boosts the market. Firstly, Fed pledged to keep interest rates low, boosting share prices on a short-term basis. Secondly, Fed said the U.S. economy is “leveling out”, meaning it is time now to wait for positive signs. Thirdly, the Fed will stop buying U.S. treasuries directly from the U.S. government by October. This is seen as a huge sense of confidence by the Fed and also made countries holding huge U.S. dollar reserve happy.
Short-term volatility will still be present. This week, Shanghai Composite Index fell, completing the worst week since February, on concern this year’s rally has overvalued the prospects for earnings growth.
As medium to long term investors, you should concentrate on the second and third point stated above. These 2 points points to a positive outlook over 3 years period, especially in Asia.
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