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Play China’s Yuan From the Long Side
Any doubts that China’s Yuan is a huge screaming buy should have been dispelled when news came out that it had displaced Germany as the world’s largest exporter.
The Middle Kingdom shipped $1.2 trillion in goods in 2009, compared to only $1.1 trillion for The Fatherland. The US has not held the top spot since 2003. China’s surging exports of electrical machinery, power generation equipment, clothes, and steel were a major contributor. German exports were mired down by lackluster economic recovery in the EC, which has also been a major factor behind the weak euro. Sales of luxury Mercedes and BMW cars, machinery, and chemicals have plummeted.
Four back to back interest rate rises for the Yuan, and a constant snugging of bank reserve requirements by the People’s Bank of China, have stiffened the backbone of the Middle Kingdom’s currency even further. That is the price of allowing the Federal Reserve to set China’s monetary policy via a fixed Yuan exchange rate. Is certain that Obama’s stimulus program is reviving China’s economy more than our own.
The last really big currency realignment was a series of devaluations that took the Yuan down from a high of 1.50 to the dollar in 1980. By the mid nineties it had depreciated by 84%. The goal was to make exports more competitive. The Chinese succeeded beyond their wildest dreams.
There is absolutely no way that the fixed rate regime can continue, and there are only two possible outcomes. An artificially low Yuan has to eventually cause the country’s inflation rate to explode. Or a global economic recovery causes Chinese exports to balloon to politically intolerable levels. Either case forces a revaluation.
Of course timing is everything. It’s tough to know how many sticks it takes to break a camel’s back. Talk to senior officials at the People’s Bank of China, and they’ll tell you they still need a weak currency to develop their impoverished economy. Per capita income is still at only $3,000, less than a tenth of that of the US. But that is up a lot from a mere $100 in 1978.
Talk to senior US Treasury officials, and they’ll tell you they are amazed that the Chinese peg has lasted this long. How many exports will it take to break it? $1.5 trillion, $2 trillion, $2.5 trillion? It’s anyone’s guess.
One thing is certain. A free floating Yuan would be at least 50% higher than it is today, and possibly 100%. In fact, the desire to prevent foreign hedge funds from making a killing in the market is a not a small element in Beijing’s thinking.
The Chinese Central bank governor, Zhou Xiaochuan, says he won’t entertain a revaluation for the foreseeable future. The Americans say they need it tomorrow. To me that means about six months. Buy the Yuan ETF, the (CYB). Just think of it as an ETF with an attached lottery ticket. If the Chinese continue to stonewall, you will get the token 3%-5% annual revaluation they are thought to tolerate. Double that with margin, and your yield rises to 6%-10%, not bad in this low yielding world. Since the chance of the Chinese devaluing is nil, that beats the hell out of the zero interest rates you now get with T-bills.
If they cave, then you could be in for a home run.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
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China one time kept the yuan tightly under wraps, however now it is time to let the currency exchange fly, writes the Wall Street Journal. Beijing had kept tight hold of the <a title="Yuan trade has taken the entire world stage" href="http://personalmoneystore.com/moneyblog/2010/12/14/global-yuan-exchange/"> yuan</a>, however time has arrived for China to cast its currency to the winds of global exchange. China has the economic strength to change world business, and investors are yearning for yuan.
Do not listen to paperbugs fools,China printing Yuan
like creazy,just like all the others.All paper is
suspicious and controlled by corrupt gouverment.
Just buy the monetairy stuff China wants;Buy PM
So far yielding +/-20% and only paying one time fee
of 4%!!!
"Double that with margin, and your yield rises to 6%-10%"
True only if your broker's margin loan rate is 0%. Margin loan rates at Schwab, TDAmeritrade and most other brokers are 6% to 9%.
Chinas Yuan is a huge screaming sell. I don't care if they have eclipsed Germany in exports or eclipsed Japan as world's no 2 economy.
Just like Japan was a screaming buy in the 90s it is clear that China is a bubble, which is insustainable and relies on euro/u.s. stability.
For those unfamiliar with the off target forecasts coming out of the Mad Hatter, here is the latest on his TBT dated 10/13/10 where he threw in the towel blaming Helicopter Ben for pulling down his shorts on the TBT trade. But as fate would have it, just when you get off (and we have all been there!), the trade turns good. TBT is up from $32.39 to $35.82 (11/26 close) a cool 10.5% ride in 6weeks in the face of QE2! Hope his take on the yuan is more on the mark.
Ahh Big Mac, you must've missed the MHFT call on selling the Yen last year which was 'a screaming buy' but lost 1500 pips or so.
'Fake' Hedge Fund Trader
Or a protectionist wave engulfs the globe as the US institues tarriffs. A very possible, yet overlooked scenario. the Yuan would fall, given that the Chinese economy would suffer a hard landing. Certainly political will for globalism is constantly being test every time the unemployment rate gets published.
Also, let's not forget that possible property bubble and the fact that so far Chinese officials have decided to raise rates and engage in price fixing to control inflation. All these factors should be mentioned as well as possible risks to your outlook.
Your comment makes too much sense for MHFT to consider. He's a tool.
I've owned CYB for a year now in my Roth portfolio of anti-dollar stocks. It's been flat. Maybe I was ahead of my time so I'll hold on another year and see what happens. Also I'm buying platinum. No reason. I just like having the stuff and think it's another safe way to gid rid of excess dollars. Plus with palladium being bid up I think it should be worth at least 3x the little sister which puts it at $2100 fair value in my book.
meanwhile, thanks for the extended backgrounder information..
but, CYB is meant for short term speculation/hedging operations..following the changes, the first derivative....thats it...UNC, the Natural Gas ETF, lots of people DID NOT KNOW THAT and got burned ....'burned by gas...ha ha he he...
ETF (CYB) buying long term, isn't the same as buying a stock/mutual fund...ETF financial mechanics of DAILY readjustments to precisely follow the track of 'underlying' results in continuous LONG TERM net attrition...totally UNLIKE a fund that actually HAD the 'underlying'
ETF => 'synthetics', using futures markets positioning, like all of WisdomTree’s exchange-traded currency products, this fund is an actively-managed ETF, meaning that it isn’t linked to any particular index. The underlying holdings of CNY consist of U.S. cash investments (generally government securities and repurchase agreements collateralized by government securities) combined in a one-to-one ratio with currency forward... contracts.