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The
Trade-Weighted Yuan Is Still Up YTD
Short Yuan Launched: November
13, 2014 & Updated: March
24, 2015
Alas for China's currency planners, there are no do-overs in financial
markets. Earlier this year when the US dollar began to strengthen in
anticipation of a Fed hike, China decided to hold the value of the yuan
steady – at least against the dollar – for assorted policy
reasons. Instead of letting the yuan adjust from day to day like any other
currency, by the time the policymakers decided to revalue the yuan, it went
far beyond what they planned and undermined many of those same policy goals.
At the top of their wish list this year has been to get IMF recognition of
the yuan as an international reserve currency, joining the dollar, yen,
euro, and pound sterling. Even as the volatility of other currencies surged,
China's propagandists could point to the yuan's stability as proof that it
is a reliable reserve currency, as well as keep the yuan out of the
headlines for members of the US Congress to see. Of course, the yuan was
stable only with respect to the dollar. Against other currencies, by
definition it has been just as volatile as the dollar.
If the currency planners had been managing the yuan against a basket of
currencies, the yuan would have been losing value against the dollar along
with the euro, yen, and the other currencies of its other trade partners in
the currency basket. Attached to the hip with the greenback, the yuan was
flat against the dollar for the year in early August. But the trade-weighted
yuan rose more than 5% – not huge in currency markets but a relatively
big move in the yuan world. Now that the currency planners have shifted
policy, even with plunge against the dollar the trade-weighted yuan is still
up 2% for the year. Further depreciation is in the air.
THE TRADE-WEIGHTED YUAN IS STILL UP YTD
Source: Bloomberg, McAlinden Research
As for the yuan joining the roster of reserve currencies, the IMF has
already signaled that won't happen for at least another year – and
that's if the IMF board decides later this year that the yuan has met enough
criteria to even get on the waitlist. If the IMF decides the yuan isn't yet
ready, it'll be another five years before the IMF's next scheduled review of
international reserve currencies.
One irony in all this is that it was the prospect of a Fed hike that helped
drive the dollar up earlier this year. By adding volatility to global
markets, in part through its botched yuan policy, China has helped give
cover to policymakers at the Fed who are inclined to delay the first US rate
hike from September to later this year or early 2016.
Last spring, MRP reiterated a recommendation to short on the yuan on the
grounds that the odds were high that policymakers would eventually resort to
a weaker yuan as part of their stimulus measures to boost the flagging
economy. We continue to expect the yuan to weaken against the dollar, but
MRP is watching for a suitable exit.
MRP CLOSED THE LONG ON STOCKS IN THE SPRING
AND IS STILL SHORT THE YUAN
Green dots denote date of original recommendation and red dots
denote the close. Source: Bloomberg, McAlinden Research
Last
updated August 25, 2015
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