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VIDEOYuan Revaluation Fizzles
The unexpected revaluation reversal has put a dent in instruments such as Wisdom Tree's China Yuan Fund.
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But in a concession to the US we can summarize as “If I do it, will you shut up already?” they let it be known by late March 2010 they would begin a revaluation at a time of their choosing; we discussed the market for yuan forwards in April. They hinted this round of revaluation wouldn't be of the straight-line variety; one thing Chinese Communists share with American politicians is a morbid fear someone, somewhere is making some money.
What was unknown, though, is just how quickly the revaluation, launched with much fanfare, would fizzle. Not only is the spot rate of 6.8108 at the time of this writing just a tad stronger than the 6.825 rate prevailing just before the revaluation began, but yuan forwards at the one-, two-, three-, and six-month horizons are signaling the 6.77 rate reached at the start of July is going to be the ceiling for the next six months at least.
As the yuan returns to school this September, it can write the obligatory “How I spent my summer vacation” essay simply by saying, “I weakened under the August sun.”
And Then The Yen
If Beijing has weakened against the greenback, it's taken a dive against the yen. Both Japan’s economy and its financial markets have been stressed by the yen’s strength. While there's no evidence the yen’s strength is the result of Chinese purchases as part of their never-ending quest to “diversify” their $2.45 trillion of foreign exchange reserves by buying anything and everything in sight, it wouldn't take much in the way of Chinese purchases of Japanese assets to push the yen higher. As the yen has gained 10% against the yuan since the height of the European sovereign credit crisis in early May, and as all countries use exchange-rate policy as a strategic tool, how much of an accident can all of this be?
The unexpected revaluation reversal has put a dent in instruments such as Wisdom Tree’s China Yuan Fund (CYB); this seeming one-way bet has lost 1.855% over the past year and 2.24% since the supposed revaluation began in June.
In addition, the weakness of the yuan against two currencies, the dollar and the yen, whose central banks have been spewing forth paper, serves as a reminder there are no easy solutions to currency trades. Anyone who focuses on macroeconomic variables such as trade surpluses, foreign exchange reserves, growth rates, and the like stands a chance of losing against politics.
As the wise man once said, “Age and treachery beat youth and vigor every time.” A country determined to keep its currency undervalued can do so when it's the world’s creditor.
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