Forex Investment and Currency Trading

CNY Performance during May:

8% annualised appreciation in CNY versus the USD.
25.80% annualised appreciation in CNY versus JPY.
12.65% annualised appreciation in CNY versus EUR.

And yet the market seems to have not priced this at all in the curve! The 1 month annualised implied appreciation at the mom is a mere -2.5% (while, as mentioned, we had -8% annualised drop in USDCNY during May). While the 1yr still trades at -6.25%.
As mentioned: #1 risk-reward, #2 the fundamental facts thus far, and perhaps most importantly #3 much reduced positioning, makes selling the pts across the curve sense…
The risks to the trade:
1) Aftermath of [...]

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1 - 3 Month Outlook
The underlying pressure for CNY to appreciate is illustrated by the fact that China’s FX reserves have increased by almost $300bn so far this year. Latterly, the pace of revaluation has slowed, particularly against the US dollar, in the face of weaker growth in the OECD economies, and there have been hints that the authorities have become more growth and less inflation focused. Nevertheless, given the size of the trade surplus and strength of FDI inflows, the positive trend in the yuan is expected to continue in the short term.
6 - 12 Month Outlook
Real GDP growth [...]

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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 [...]

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USD/CNY
Current Spot Rate - 6.85

3Q2008 - 6.70
4Q2008- 6.45
1Q2009 - 6.27
2Q2009 - 6.14
3Q2009 - 6.05
4Q2009 - 6.00

Macroeconomic Trends and Prospects
China economy is expected to slow down moderately in 2Q 2008 (market consensus 10.4% yoy vs. 10.6% in 1Q 2008) “in an expected direction of macroeconomic control” (Premier Wen). The authorities have shifted rhetoric from preventing overheating to ensuring stable economic growth. In fact, there are additional signs of continued moderation of economic activities. June PMI reached a two-year low at 52, following the decline in May to 53.3. The 2Q 2008 entrepreneur confidence index dropped to 134.8 from 140.6 in 1Q [...]

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