Forex Investment and Currency Trading

While short CNY NDF positions are beginning to look attractive, the better play is perhaps to proxy CNY through a basket of other Asian currencies that also have merit in their own right. Since the one-off CNY revaluation and partial float in July 2005, the basket of Asian currencies that has best tracked the implied appreciation in the 12 month CNY NDF is 31% TWD, 28% SGD, 24% MYR and 16% PHP. (Technically, this is the basket of currencies that minimises the sum of squared weekly tracking errors vs USD. The contribution made by adding KRW or INR is statistically insignificant.)

As well as closely shadowing expected CNY appreciation pressure, a diverse basket of Asian currencies capitalises on the ongoing shift in regional policy priorities away from supporting growth toward suppressing inflation. Inflation in non-Japan Asia in aggregate (6.2% y/y in March) is at a decade high and well though the peak seen in the wake of the 1997 devaluations.