China Loosens Currency Policy; Stocks Open Strong, but Falter -- Daily Mortgage Rate Update for June 21, 2010

Currency rise would mean imports more expensive, but what is the implication for rates? Rate Lock Report for June 21, 2010

When I wrote the rate update last Friday, I wasn't expecting we'd have much to talk about today. I was wrong. Over the weekend, China made a major announcement, saying that it would allow its currency to float somewhat more freely compared to the US Dollar. For the last two years, the Renminbi, or yuan, has traded in a very narrow range with the dollar, as China instituted an effective currency peg to the dollar in response to the financial crisis.

It is widely anticipated that the yuan will appreciate relative to the US dollar, reflecting the relative strength of the Chinese economy. This appreciation will have an effect on prices of imports that are made in China. I would not be surprised to see the yuan appreciate from the current rate of 6.8 yuan per dollar to something closer to 5 yuan per dollar by the end of 2011 barring any further action from China. Such a move would benefit the US economy by making US products more affordable to Chinese consumers. It would also make US products more competitive domestically compared to Chinese.

These changes will also help to shrink the trade imbalance that exists between the two countries. This will be a gradual change, though, as China's announcement indicated it intended to manage its currency exchange rate so that it does appreciate or depreciate more than 0.5% per day.

In the short run, investors reacted very positively to this news at the market open this morning, but their excitement faded into the afternoon. Mortgage pricing, which had opened sharply lower, strengthend, and is currently even higher than Friday's already strong close. Last week, 30-year fixed rates averaged 4.75% with 0.7 points, according to Freddie Mac.

While we have benefitted substantially from floating recently, signs are pointing to a distinct possibility that this period of strength may be ending in the not too distant future. It is still Safe to Float today, but I expect that this week will be a bit bumpier than last. You may want to lock in Wednesday morning if pricing is attractive enough, so do keep an eye on the markets and this space.

We have a very busy week coming up from the perspective of economic data and actions, despite starting with no data whatsoever today. Between economic data and the Federal Reserve Open Markets Committee meeting, plenty of opportunity exists for pricing to worsen. Here's the rest of this week's events:

Tuesday:

• Existing Home Sales
• Treasury Auctions 4-week bills and 2-year notes
• FOMC Meeting starts

Wednesday:

• New Home Sales
• 5-year notes auction
• FOMC policy announcement

Thursday

• Durable Goods Orders
• Jobless Claims
• 7-year notes auction

Friday

• Final 1st quarter GDP
• Consumer sentiment

Clearly, there are a lot of opportunities for things to get worse this week, and with mortgage-backed securities already trading at their highest point ever, there is more risk of losing than chance of gaining as we get later into the week. One important point should be made about this week's home sales figures. Unlike Pending Home Sales that reflect possible future sales, this week's data reflects closed sales from the month of May, so it should give a very clear indication of the success of the tax credit. 

Please don't hesitate to call me today at (401) 263-8655 if you have any Rhode Island Refinance questions. You can also reach me by commenting on this article.

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June 18, 2010 Report

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and serves as an Adjunct Professor of Finance and Economics at Roger Williams University and the University of New Haven. He has been helping homeowners and homebuyers with their mortgage questions for over 10 years.