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China – Short Yuan

Launched: November 13, 2014, and updated March 24, 2015, August 25, 2015, and December 8, 2015.

After jolting the markets with a sudden revaluation in August, China's currency managers are again allowing the yuan to weaken against the dollar. After the summer plunge, the yuan strengthened modestly through October but has since resumed weakening. Since August, the yuan has weakened a net 3% against the dollar, even as the trade-weighted dollar is up less than 1% over the same period.

MRP recommended taking a short position against the yuan on November 13, 2014 when it was far from consensus. While the theme has since gained wider recognition, MRP affirms the recommendation into 2016. As today's Daily Intelligence Briefing shows, the planners have plenty of reason to embrace a weaker yuan.

China's currency reserves have fallen in 9 of the last 11 months, an unprecedented decline. The IMF's decision to include the yuan in the basket of official currencies is now in the rear-view mirror; eventually, this can be a source of currency strength as central banks and investors add the yuan to their portfolios, but for the immediate future a weaker yuan presents less of an international issue than before the IMF's decision. As economic growth struggles, China is adding fiscal and monetary stimulus to the system, and a weaker yuan complements those measures heading into the first quarter of 2016.


STAYING SHORT THE YUAN

 Source: Bloomberg, McAlinden Research


Last updated December 8, 2015
 
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Warren Hatch, PhD, CFA
Portfolio Management and Global Investment Strategy
McAlinden Research Partners

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