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 If You Think Dollar Is Strong, Yuan Is Stronger

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Posts : 34660
Join date : 2011-08-09

PostSubject: If You Think Dollar Is Strong, Yuan Is Stronger   Wed Nov 12, 2014 1:30 pm

With more monetary easing from the European Central Bank and the Bank of Japan, the U.S. dollar has gone progressively stronger – except when it compares to yuan. Since June, the Chinese currency has gained about 2% recently trading at 6.13 per dollar offshore.

And there is political consideration that the yuan can go stronger.

“China has a broader agenda, involving economic reform and rebalancing, which sets it apart from the other countries involved in the currency war,” wrote HSBC economist Paul Mackel and team. From the new “Silk Road” project, to free-trade agreement with Korea, or the Hong Kong Shanghai Connect, Beijing has an incentive to see yuan as a reserve currency – which means it can’t slide yuan like yen.

Interestingly, as the APEC meets this week, the People’s Bank of China yesterday raised its yuan reference rate by the most since 2010 when Beijing essentially removed the peg, observed Bloomberg.

Today, Hong Kong scrapped the daily limit (20,000 yuan, or $3260) on the amount of yuan its residents can buy. Hong Kong residents have in the past converted their salaries in Hong Kong dollar, which are pegged to the U.S. dollar, to yuan to hedge against the imported inflation from mainland China. The U.S. dollar “points edged slightly lower following the HKMA’s regulatory change, as the market takes the measure as being more supportive for offshore RMB funding,” wrote HSBC.

With a stronger yuan, who can gain? As Chinese feel richer and itch to go abroad, the most obvious beneficiary would be travel agencies and airlines with more overseas exposure, such as Ctrip.com (CTRP) or China Eastern Airlines (CEA). Oh by the way, Chinese tourists may be coming to America in large droves, now that the U.S. has relaxed visa restrictions on Chinese citizens. Ctrip jumped 4% upon the news.

In the last three months, the WisdomTree Chinese Yuan Fund (CYB) rose 0.7%, the iShares China Large Cap ETF (FXI) lost 3.8% and the iShares MSCI China ETF (MCHI) fell 4%.


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