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Interest rate predictions
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August 17, 2005 If you hear that the mortgage rates here in the U.S. are being affected by
China's currency adjustments don't be surprised. Until last week there was a
significant improvement in the rates. And then China declared that they were going to raise their currency, Yuan, in
value against the dollar by 2.1%, with the possibility of further increases in
the future. Since 1994, the Yuan's value had been fixed at 8.28 to the dollar.
Last week they announced they were going let their currency float against
different foreign currencies.
This caused a significant flutter in the bond market. Due to a stable
Yuan-Dollar rate there has been a heavy Chinese investment in the U.S. bond
market. The market felt this immensely positive trend would subside in the near
future due to a dearer Yuan. In addition to that, to manage the Yuan's daily
value, China might invest more of its financial reserves in other nations'
bonds.
Besides this sudden announcement, bonds ascended on Friday and almost touched
its previous level of trading.
This recent phenomenon puts a question mark on the overall future growth of
the bonds market. Will it grow strong enough to break the present ceiling or
start moving southward, consequently pushing the rates high. Ironically, a
better economy means bad rates and as the current indicators show, the pastures
of economy are growing greener and greener. So for rates to move significantly
higher the economy has to do far better than currently it is doing, and
unfortunately, this doesn't seem to be achievable given the current situation.
So it seems the rates will keep going up and coming down without breaking its
present ceiling, eventually achieving a downward movement, slightly worsening
the rates trend. - By Amrit Hallan for CMR Loan news.
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