The Trade Weighted Yuan is Still Up YTD
Alas for China's currency planners, there are no do-overs in financial markets. Earlier this year when the US dollar began to strengthen in anticipation of a Fed hike, China decided to hold the value of the yuan steady – at least against the dollar – for assorted policy reasons. Instead of letting the yuan adjust from day to day like any other currency, by the time the policymakers decided to revalue the yuan, it went far beyond what they planned and undermined many of those same policy goals.
At the top of their wish list this year has been to get IMF recognition of the yuan as an international reserve currency, joining the dollar, yen, euro, and pound sterling. Even as the volatility of other currencies surged, China's propagandists could point to the yuan's stability as proof that it is a reliable reserve currency, as well as keep the yuan out of the headlines for members of the US Congress to see. Of course, the yuan was stable only with respect to the dollar. Against other currencies, by definition it has been just as volatile as the dollar.
If the currency planners had been managing the yuan against a basket of currencies, the yuan would have been losing value against the dollar along with the euro, yen, and the other currencies of its other trade partners in the currency basket. Attached to the hip with the greenback, the yuan was flat against the dollar for the year in early August. But the trade-weighted yuan rose more than 5% – not huge in currency markets but a relatively big move in the yuan world. Now that the currency planners have shifted policy, even with plunge against the dollar the trade-weighted yuan is still up 2% for the year. Further depreciation is in the air.
THE TRADE-WEIGHTED YUAN IS STILL UP YTD
As for the yuan joining the roster of reserve currencies, the IMF has already signaled that won't happen for at least another year – and that's if the IMF board decides later this year that the yuan has met enough criteria to even get on the waitlist. If the IMF decides the yuan isn't yet ready, it'll be another five years before the IMF's next scheduled review of international reserve currencies.
One irony in all this is that it was the prospect of a Fed hike that helped drive the dollar up earlier this year. By adding volatility to global markets, in part through its botched yuan policy, China has helped give cover to policymakers at the Fed who are inclined to delay the first US rate hike from September to later this year or early 2016.
Last spring, MRP reiterated a recommendation to short on the yuan on the grounds that the odds were high that policymakers would eventually resort to a weaker yuan as part of their stimulus measures to boost the flagging economy. We continue to expect the yuan to weaken against the dollar, but MRP is watching for a suitable exit.
MRP CLOSED THE LONG ON STOCKS IN THE SPRING AND IS STILL SHORT THE YUAN
- The yuan's rout is making the euro look better than it did during Grexit days
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