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 [...]

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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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Spot

Non-convertible. Need a document asset transaction to be able to trade spot. Managed float vs undisclosed basket by CB, band width of +/- 0.5%, to last closing.

NDFS

NDFs typically trade up to one year, but longer NDFs possible up to five years, reasonably liquid and tenors stretch out to 10 years but infrequently traded. Standard size is up to USD 10 million.
Fixing time – 9:15 am – 9:30 am local time (Beijing), two days prior to maturity/value date.
Publication Site – Reuters SAEC. Bloomberg NDFF.
Publication Time – Fixing two days prior to maturity/value date.
Additional Comments – Fixing by PBOC with participation [...]

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The USD Collapse
We have entered a new world – scared rather than brave. Since the start of 2008, the DXY (USD) index has declined by -6% and with more bad news likely to come out of both Wall Street and Main Street over the next few weeks, there is little reason to be bullish on the U.S. economy or the USD near term. Further deterioration is likely. This is significant for the CNY since it seems to us that China’s currency has been targeting a gradual appreciation against the USD, rather than the basket. In practice, this regime has delivered [...]

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