Forex Investment and Currency Trading

The USD Collapse

We have entered a new world – scared rather than brave. Since the start of 2008, the DXY (USD) index has declined by -6% and with more bad news likely to come out of both Wall Street and Main Street over the next few weeks, there is little reason to be bullish on the U.S. economy or the USD near term. Further deterioration is likely. This is significant for the CNY since it seems to us that China’s currency has been targeting a gradual appreciation against the USD, rather than the basket. In practice, this regime has delivered stable expectations to Chinese exporters to the US, though there is little stability for anyone else.

A moderate appreciation against a depreciating currency is not an appreciation – it is a depreciation. In February, the CNY’s effective exchange rate barely moved and so far in March it has lost nearly -1%. Take a look at Table 2 which shows the CNY’s moves against the major currencies from 1st January this year to 18th March. Despite a 3.2% appreciation against the USD so far this year, China’s currency has depreciated by -3.2% against the Euro (EUR) and -9.4% against the Japanese yen (JPY). In total, the CNY
nominal effective exchange rate (NEER) has weakened by -0.2%. If one looks at a longer timeframe, the situation is even plainer. Compare today with 1st January 2006 and one finds that while the CNY has appreciated by 12.2% against the USD, it has fallen -16.0% against EUR and -3.4% against JPY. Overall, its exchange rate has weakened -1%. In other words, contrary to popular belief the CNY is not really appreciating. This would not matter if the U.S. was China’s biggest export market, but it is not. Last year, we calculate, the U.S. only purchased 22% of China’s goods – and only provided 13% of the increase in exports. Europe, in contrast, bought 27% and was responsible for 31% of the growth.

Inflation Fighting is More Important than Protecting Exports to the U.S.

We know that Beijing officials are now worrying about China’s exporters – and there clearly is a risk that policymakers listen to those who are calling for less appreciation, rather than more. However, we would be tempted to simply say ‘Forget about the U.S. export market this year’. Whether the CNY appreciates by 5% or 10% or 15% against the USD, this is not going to change the fact that there will be very limited demand from the U.S. consumer as his house price falls, his company reduces workers, his bank draws back on its loans and his confidence remains damaged. China’s exports to the U.S. are already anaemic. The sluggish demand is the main reason. Look more to Europe, now China’s biggest export destination, where sales are still growing at 25% y/y. The issue here is the CNY is already -4.9% vs.EUR this year. CNY would have to appreciate 16% vs. EUR just to get us back to the level of January 2007.