Forex Investment and Currency Trading

U.S. and Chinese officials are preparing to gather next week for the latest round of their Strategic Economic Dialogue, and as in the past yuan appreciation will be a critical agenda item. In one of those accidents of history, Treasury Secretary Hank Paulson may make progress on this issue thanks to an entirely unintended helping hand: the mounting dollar cost of raw materials critical to China’s growth.
This may seem counterintuitive when China’s exporters are already hurting from the yuan’s recent appreciation. In real, trade-weighted terms the yuan has moved less than 10% since July 2005, while nominally rising 19% against [...]

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Since early-April, the CNY/USD appreciation rate has slowed significantly to around 6.7% annualized rate in April-May, down from 17% in the first three months of the year. As a result, the non-deliverable forwards (NDF) market’s expectation for 12-month CNY/USD appreciation has also been scaled back to 6.6% from 11.7%. Is the slower CNY appreciation rate a change of course? Or is it just a normal China-style “stop” before the “go” again?
It is more likely to be the latter, and the current USD/CNY forecasts are 6.76, 6.60 and 6.30 on 3, 6 and 12-month horizons, implying 10% appreciation in 12 months’ [...]

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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 [...]

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10% CNY appreciation expected in 2008. The authorities are increasingly targeting gains against the Euro as well as the USD.
The CNY has appreciated 4% since the start of the year, its largest three-month gain since revaluation in 2005. The annualized pace of appreciation is likewise running around 15%. Rising inflation pressures are a popularly cited reason for the recently large gains. The authorities have also talked of targeting CNY gains against a trade-weighted basket, rather than just the USD. The Euro area is currently China’s most important trading partner, yet the EUR has risen 1% against the CNY this year. [...]

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The CNY should appreciate by 10% pace in 2008. But a one-off revaluation looks ever less likely. The authorities are turning increasingly cautious in the face of slower export growth and a stabilizing trade surplus. Inflation is not yet a large enough concern to justify a significantly faster pace of appreciation.
China’s economy is showing signs of cooling. It’s early days, and the economy may yet reaccelerate. But policy tightening and weaker global demand are starting to weigh on growth. China has not decoupled. Exports slowed convincingly in Q4. However, domestic demand is relatively robust as underscored by the strength of [...]

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