Euro Appreciation and Chinese Fear of Floating: Pressures from the NDF Market

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This paper examines financial market data to assess the likelihood of renminbi appreciation and its implications for Chinese financial markets, given the continuing strength of the Euro against the U.S. dollar. Using VAR and Bayesian VAR estimation, it is found that the 3-month non-deliverable forward premia are key series linking the Euro to financial market movements in China. By contrast, the NDF market for the Korean Won, based on a more flexible spot exchange rate and open access to domestic banks, plays little or no role linking the Euro to domestic currency or financial markets.