FX Fundamental Analysis CNY/USD Chart
If China truly wants to retain credibility on the international field, the playing field will have to be levelled from its presently tilted angle.
attention may soon switch. These arguments and considerations are more fundamentally based and we think it’s only fair to give the Eurozone a wide berth as the ongoing solutions continue to be rolled out.
So looking towards China, while we don’t yet see the Chinese currency on a straight-line ascent to parity with the USD, we do consider that the chances of an ultimately lower Dollar and an ultimately higher Yuan are both distinctly apparent. See earlier reference to the undeniable trend of a lower trade-weighted USD. Even if putting aside demographic arguments for a minute (USA population 313 million, China population more than quadruple at 1,354 million) the chart below
14 FX TRADER MAGAZINE January - March 2012
shows just what the politicians around the world are talking about when it comes to suggestions that China is keeping its exchange rate artificially weak.
Of course the fact that the Yuan remains a managed, non- deliverable currency on the international stage is in direct conflict with the deliverable goods it exports to the masses at just fractions of the cost it would be to buy domestic. Take away or reduce the artificial currency weakness and the cost of items that can now be made in, exported from and delivered by China suddenly and perhaps dramatically increases.
If the cost of a ‘Made in China’ widget suddenly or even gradually jumps to converge with a
domestically produced widget, maybe the patriotic rationale of those countries with high trade deficits might even persuade the respective masses to spend that extra Dollar (or Pound or Euro) and buy American, (or British, European), thus reversing, eroding and over time eliminating much of China’s financial superiority and surplus. If China truly wants to retain credibility on the international field, the playing field will have to be levelled from its presently tilted angle.
That all sounds like pie in the sky right now but if one takes the exchange rate from 1981 at 1.75 (too low) and takes the recent pre- float rate of 8.2765 (too high) and then considers that even a typical
FX market retracement of say 50% of that entire range is possible, we are looking at the prospect of an exchange rate of around 5.01. The rate today is 6.3466 and the average for the past 30 years is 6.22.
This looks like it would be a huge move but we have already discussed how the Brazilian currency, which is also controlled to a point under a managed floating mechanism, moved by 25% in two months this past year, albeit in the opposite direction.
The point to be made here is not the direction itself but more so the market’s tendency to allow such moves to take place by periodic overvaluation or undervaluation
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