www.DailyFX.com .. After taking their first step towards a more flexible currency back on July...

... 21st, we
have not heard much from China since then. At the time, China had revalued their
currency by 2% to 8.11 against the dollar and announced their decision to allow the
Yuan to fluctuate 0.3% intraday with a new closing price set at the end of each
trading day. They also announced their intentions to move to a managed floating
exchange rate against a basket of currencies. Since then, we had been waiting for
China to disclose the components of the basket and that was exactly what we saw this
morning.

The People's Bank of China said today that the main components of the basket will be
the US dollar, the Euro, the Japanese Yen and the South Korean Won. Other
currencies holding a lesser weighting in the basket are the Singapore dollar, the
British pound, the Malaysian Ringgit, the Australian Dollar, the Russian Ruble,
Thai Baht and Canadian Dollar. Although the exact percentage weightings were not
disclosed, and we had expect China to mimic Singapore in not doing so, they did say
that the weights will be based upon how much trade each country does with China as
well as how much debt China owes to each country. China has refrained from
disclosing the basket weightings because it would provide too much information for
speculators. We have long forecasted on www.chinarevaluation.com that if China
decides to peg the Yuan against a basket of currencies, that the basket would have
to include their largest trade partners. As of last year, Europe, the US and Japan
constituted China's largest trade partners. With the value of trade between China
and Europe and China and the US fairly close, we expect the dollar and the euro to
constitute very similar weightings in the basket with the Japanese yen tracking not
far behind. This announcement has been and will continue to be very positive for
the Japanese Yen and the Euro as the China, one of the biggest players in the
global reserve market gradually aligns their reserve holdings with the reference
basket for their managed float. China also announced today that they will allow
banks who conduct over $2 billion in foreign trade to trade Yuan forwards and
swaps.

The target of a floating exchange rate still remains a possibility, but for now, we
think that China is quite satisfied with the significant changes that they have
made lately and will probably take some time to digest their latest changes. We do
not expect China to make another move for at least a few months, but what we do
see, and what we expect to be consequence of China agreeing to revalue is increased
talk of Chinese firms looking abroad for acquisition targets.

Kindest Regards,

Kathy Lien
Chief Strategist
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: klien@fxcm.com


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