On Saturday the Chinese government announced that they would allow their currency, the yuan, to float in a broader trading range against the US dollar. This morning the yuan rose to the highest level in the modern era. How might this impact mortgage rates?
For years the Chinese government has subsidized foreign currencies, especially the US dollar, in an effort to keep the cost of their exports low for foreign consumers. This is partly why so many of our goods are manufactured in China.
One of the ways in which the Chinese government accomplished this objective was by investing heavily in US dollar-denominated assets such as US Treasuries and Mortgage-backed bonds (MBS’s). By exchanging Chinese Yuan for US Dollars to purchase these assets they were able to create high demand for the US Dollar which drove up it’s price relative to the yuan. It also created substantial demand for these types of assets which has helped keep interest rates low.
The US has been putting political pressure on China for months to loosen their monetary control over the two currencies. US politicians would like US goods and services to become less expensive to the growing consumer population in China. The announcement over the weekend is a sign that China is finally feeling more confident in their ability to generate domestic demand for their own goods. This is good news for US manufactures and exporters BUT it’s not particularly good news for mortgage rates because China is likely to pull back on their aggressive US dollar-denominated asset purchases.
I don’t anticipate this impact of this announcement to be extremely acute but with time I would expect it to pressure rates higher.