Forex Investment and Currency Trading

The Chinese yuan (CNY) has been on an appreciating path since its de-pegging and revaluation on 21 July 2005. The pace of this appreciation appeared to pick up sharply in Q4-07, in line with the public change in official rhetoric to “tight” rather “prudent” economic policy. Since then, a shift by the Chinese authorities has been noticed in Q1-08, which appeared to favour managing the CNY on a trade-weighted basis rather than just against the USD. Indeed, since April, the CNY Nominal Effective Exchange Rate (NEER) has appreciated sharply, helping to curb inflationary pressures in the process. Near term, market expects to see further CNY spot gains in order to limit headline inflation.
However, with CPI numbers starting to stabilise and Chinese GDP growth numbers having slowed now for the last four straight quarters, there is an increasing risk that the policy focus in Beijing may shift heading into 2009. Economic policy is unlikely to be as tight next year in China. Moreover, market is looking for a sharp USD rally in H1-09. As a result, USD-CNY forecasts now include a “bump” higher in H1-09, which is not currently priced in. If this is right, this will be a very significant development. USD-CNY forecasts reflect the view that the CNY will continue to be managed on a trade-weighted or NEER basis. Thereafter, it will be further gradual CNY appreciation against the USD.