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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1 – 3 Month Outlook – CNY
China’s FX reserves soared by a massive $128.4bn in the first four months of the year as the authorities sought temporarily to stabilise the USD/CNY rate. Latterly, however, the Chinese currency has begun to appreciate once again, breaking below the 6.9 level. This positive trend is expected to continue in the short term.
6 – 12 Month Outlook – CNY Consistent appreciation
The full breakdown of 2007 nominal GDP by expenditure presents a picture of gradual growth rotation towards domestic demand and in particular a greater role for private consumption in the economy’s expansion. Especially [...]

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We have had a massive unwind of short US dollar / long RMB positions from the hedge fund community given the slower pace of the RMB appreciation from the People’s Bank of China (PBOC).  The positions have been exited as a result of the general US dollar rally versus the EUR and GBP over the past week which has prompted a US dollar rally against most currencies and the fact the PBOC slowed its appreciation to only 0.50-0.75% in the month of April.  For your guide, we averaged 1.5% appreciation from November 2007 through March 2008.
Overall, this should be a [...]

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