Forex Investment and Currency Trading

Many observers have been pointing out that slowing Chinese growth will likely trigger a policy response, and indeed, monetary policy has already been eased to some extent. Many also perceive a change in FX policy, given the Renminbi has been stable versus the Dollar for some time now. NDF forward markets even price outright CNY depreciation going forward. However, in the global context, the CNY should appreciate to help shrink China’s external surplus. This seems to be happening. In trade weighted terms the CNY remains one of the strongest currencies globally, up about 10% since early August, mainly as the result of the massive appreciation of the Dollar, which drags the Renminbi up against most other currencies.

But this in fact raises another issue: the rapid Dollar strength is odd as it suggests a rebalancing contribution from the US - the country with the biggest deficit still. Arguably the US deficit will continue to narrow regardless, due to lower energy import prices and much slower domestic demand but a much stronger Dollar remains unhelpful, in particular when China has arguably much more capacity to shoulder more of the adjustment. Moreover China’s trade surpluses in August and September were the largest on record suggesting the CNY appreciation has been far from sufficient so far.

In other words there is a strong case to make for further CNY appreciation versus all currencies, including the Dollar, to allow China shrink its currently still growing surplus. This is something that has also been noticed during the current US election campaign. Presidential candidate Obama wrote in a letter published this week that China’s huge trade surplus with the United States is “directly related to its manipulation of its currency’s value.” China must change its policies, including its foreign exchange policies, so that it relies less on exports and more on domestic demand for its growth.”

Given the tightly controlled Chinese FX policy, market forces will likely play a minor role in this
adjustment. Indeed there seems to be growing internal political pressure from the suffering
export industry to the let the CNY appreciate more against the Dollar. This in turn suggesting a
more interventionist US Administration may decide to exert external pressure. And in doing so
the benchmark should not be any target number of appreciation but rather a notable narrowing
of the Chinese surplus as a true contribution to global rebalancing in these difficult times.