| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Ronald Arculli, chairman of the Hong Kong exchanges, discusses the internationalization of the Chinese currency. Source: YouTube, December 29, 2010 (hat tip: Global Investor Blog).   By Prieur du Plessis, on November 18th, 2010 posted in: Currencies, Guest Bloggers  Leave your comment
This post is a guest contribution by Niels Jensen, chief executive partner of London-based Absolute Return Partners. Earlier in the year I had the pleasure of having lunch with hedge fund manager John Paulson. When asked what he anticipated to be the main driver of investment returns over the next few years, he responded without hesitation: “Currencies”. I thought long and hard about that answer and haven’t been able to get the discussion out of my head since. John Paulson’s logic is simple. The world is in the unprecedented situation of all four major trading currencies (EUR, GBP, JPY and USD) facing their unique set of challenges. But not all four can fall at the same time. Currencies are unique in the sense that they are relative as opposed to absolute trading objects. You don’t just buy dollars. You buy dollars against some other currency which is why they can’t all fall at the same time. The world has already caught on to this, with the financial media falling over themselves in recent weeks, competing to present the goriest story about how competitive devaluations will take down the world as we know it today. The scaremongers may have their day in the sun, but ultimately common sense will prevail and currency traders will have to go back to focus on housing starts again. Morgan Stanley published a very interesting research report only last week in which they produced estimates of how much the major trading currencies of the world need to appreciate (depreciate) vis-à-vis USD in order to bring their current account surplus (deficit) within 4% of GDP, which Morgan Stanley have used in their model as the threshold level. Please note that the changes in exchange rates suggested by Morgan Stanley’s model do not reflect their actual views on those same currencies – the model is purely theoretical but provides a good illustration as to how much out of whack many currencies are today.
Chart 1: G10 Misalignment from Model (2011-15)
As per Morgan Stanley’s work, in the context of G10, only CHF is seriously undervalued vis-à-vis USD with a 20% appreciation required in order to bring the Swiss current account surplus down to a more reasonable 4% of GDP – see chart 1. On the other hand, outside G10, many emerging market currencies are currently significantly undervalued, with SGD standing out as the worst culprit, being over 30% undervalued – see chart 2. Chart 2: EM Misalignment from Model (2011-15)
Click here for the full report. Source: Niels Jensen, Absolute Return Partners, November 17, 2010. More on this topic (What's this?) If Happiness Were the Only Global Currency, How Would the Most Important Decisions in Your Life C... (the Underground Investor, 4/11/12) Iraqi Dinar Update (Wealth Daily, 5/18/12) Counterfeit Money: The History of Fake Currency (Value Investing, 5/15/12)
The U.S. Treasury unveiled the new $100 bill on Tuesday, with added security features to make it harder to counterfeit. I am awaiting the day when the printing presses start spewing out larger denominations. It is anybody’s guess at what level gold bullion will be trading when that happens. Source: YouTube, April 21, 2010 (hat tip: The Big Picture). More on this topic (What's this?) Gold Price Forecast for the Remainder of 2012 (Investment U, 5/18/12) What’s Happening to Gold and Silver Prices? (Learn Mining News, 5/14/12) Everything You Need to Know About Gold Prices (Money Morning, 5/11/12) By Prieur du Plessis, on April 2nd, 2010 posted in: Currencies, Guest Bloggers, Renminbi Leave your comment
This post is a guest contribution by Dian Chu, market analyst, trader and author of the Economic Forecasts and Opinions blog. The use of the Chinese Renminbi in Hong Kong is on the increase. Over the last ten years, the Renminbi (RMB) or yuan, has been slowly gaining influence in the markets that surround mainland China. And about one year ago Hong Kong, a major commerce and trading hub, introduced a new trade settlement that allowed Hong Kong business’ to use the RMB as a trading currency. Three stages for yuan With the rapid development of China’s foreign trade, the RMB is increasingly flowing out of China. Although it still lacks broad international circulation, many analysts believe the Yuan should eventually become a major international trading currency. In a China Daily interview (clip below), Dr. Billy Mak, Associate Professor in Finance at Hong Kong Baptist University believes this will happen in three phases:
According to Mak, we are in the early stage of phase one since RMB is used as a trade settlement currency just last year. Asian Monetary Fund launched Asia became keenly aware of the need for a liquidity safety net following the Asian financial crisis that hit the continent in 1997 and 1998. Wary of a dollar crisis, it is in China’s interest to promote its own currency as alternatives. As part of the strategy to wean itself off the dollar and the dependency of exports to the U.S., China, together with Korea, and Japan, also became a member of a regional fund lauched just this month by the ten ASEAN (Association of Southeast Asian Nations) member nations. The $120 billion fund known as the Chiang Mai Initiative Multi-lateralization Agreement has come into effect to act as a safety net for member countries in the case of an urgent need of liquidity (e.g. a U.S. dollar crisis). Although not quite the status of an Asian Monetary Fund (AMF) yet, one thing for certain is that the region now has its own financial safety net which can perhaps one day grow to become an AMF. Line blurred – capitalism & communism While China seems more focused on promoting bilateral trade agreeements and forming economic alliance, the United States, in sharp contrast, appears to be alienating major trading parterners with a weaker currency than its own, and feverishly interfering with private companies’ operations. While there’s an ongoing debate about the two systems – at the moment – it seems this unprecedented global financial crisis is nudging the US towards much despised centralized system, while China is becoming much more capitalistic. Source: YouTube, March 23, 2009 (hat tip: Mar Turok). Source: Dian Chu, Economic Forecasts and Opinions, April 1, 2010. More on this topic (What's this?) London’s Bid to Become the Yuan Trading Capital of the World (Wall Street Daily, 4/19/12) China Widens Yuan Band (Jutia Group, 4/16/12) How the Yen-Yuan Agreement Benefits the United States (Investment U, 1/12/12)
A picture speaks a thousand words … at least when considering the external value of the Chinese renminbi as measured by the Big Mac Index. For those not familiar with the Big Mac Index, it is published by The Economist as an informal way of measuring the purchasing power parity (PPP) between two currencies and supposedly provides a test of the extent to which market exchange rates result in goods costing the same in different countries. According to The Economist, it “seeks to make exchange-rate theory a bit more digestible”.
Source: Agora Financial’s 5 Minute Forecast, March 23, 2010. More on this topic (What's this?) China, Big Macs, Roach, and Krugman (The Mess That Greenspan Made, 3/19/10) London’s Bid to Become the Yuan Trading Capital of the World (Wall Street Daily, 4/19/12) The Big Mac Index And Foreign Exchange Investment (InvestorCentric, 2/1/10)
This post is a guest contribution by Rebecca Wilder, author of the of the News N Economics blog. Don’t let anybody tell you they know what the Chinese government will do with the yuan because they don’t. If you are interested in the pros and cons of yuan revaluation, some time ago Michael Pettis wrote a nice article worth revisiting. Basically, all signs economic point towards yuan appreciation. The fact is, that nobody in the entire world, except for a handful of people of course, knows the plan for the yuan. Markets have become more and more convinced the yuan will appreciate over the next year.
The chart above illustrates the implied currency rate for the value of the US dollar (USD) in Chinese yuan (CNY) one year from the date shown on the X-axis, as derived from the 1-yr ahead non-deliverable forward. For some time, markets have “thought” the Chinese would let the yuan appreciate against the U.S. dollar (a movement down the Y-axis is an appreciation of the yuan and a depreciation of the U.S. dollar). But ex post, markets have no clue.
The chart above illustrates the implied currency rate for the value of the US dollar in Chinese yuan by the 1-yr non-deliverable forward one year before the X-axis date in blue. The current ex post spot rate one year later (the date on the X-axis) is in red. Basically markets are just fine at predicting trends, i.e., the positive correlation between the spot and forward rate spanning 2006 and 2007. But the reality is that markets have absolutely no idea how the Chinese will value the yuan in one year, as illustrated by the -0.47 correlation coefficient spanning the years 2008 to current. In fact, markets were looking for further yuan depreciation one year ago, but guess what: the yuan hasn’t budged since 2008, roughly 6.83 CNY per USD. Source: Rebecca Wilder, News Economics, March 15, 2010. More on this topic (What's this?) Goldman Backs Money Morning Prediction That China's Yuan Will Dethrone the Dollar (Money Morning, 3/19/10) London’s Bid to Become the Yuan Trading Capital of the World (Wall Street Daily, 4/19/12) China Widens Yuan Band (Jutia Group, 4/16/12) |
![[Most Recent Charts from www.kitco.com]](http://www.kitconet.com/charts/metals/gold/t24_au_en_usoz_4.gif)
 (requires Windows Media Player) 
|      
   | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Copyright © 2012 Investment Postcards from Cape Town - All Rights Reserved Performance Optimization WordPress Plugins by W3 EDGE | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Email
U.S. stock market – long-term indicators could go either way
Jim Grant on “The Scream” painting, Fed’s “hall of mirrors”
Prieur’s Readings (May 5, 2012) – staying up to date with top money news
Don Coxe webcast – updated (May 4, 2012)
Laugh out Loud: EU debt whack-a-mole
Recent Comments