Go Long Chinese Currency with CYB

June 24, 2010 by  
Filed under Commentary, ETFs, Pick of the Week

Currency trading is unique among investing. As we noted in our euro recommendation, currencies have moved from obscurity to prominence in a few short years. The foreign exchange market is the largest market in the world with almost $4 trillion changing hands each day – that’s trillion with a “t”. China’s currency will be adding even more to those numbers soon.

Chinese currency has had an interesting history. Officially known as the Yuan, it is also called the renmibi. China began issuing the Yuan in 1897 during the Qing Dynasty. It was eventually issued by various provinces and several governments throughout the Middle Kingdom. After World War II, government debts caused Yuan hyperinflation under the Nationalist regime. This event, along with military prowess, helped the Communists gain control of the country in 1949.

After Mao’s socialist experiments, China began more open economic policies during the 1970s. However, they still kept a tight reign on the Yuan. Unlike other major currency sponsors, the Chinese government has carefully managed the Yuan exchange rate. Due to economic circumstances in 1980, the government appreciated the Yuan to 1.5 to $1. However, it fell to 8.62-to-1 Dollar in 1994 – its lowest point to date.

From 1997 to 2005, the Yuan saw a steady exchange rate of 8.27. It was then decoupled from the Dollar. The Chinese government reinstituted the peg in 2008 during the financial crisis. On Monday, the Chinese government made news by depegging the Yuan yet again allowing the Yuan to float in a ‘managed floating exchange rate’. Beijing may be getting more flexible, but they’re not willing to allow the rate to float completely.

As the market is trying to find its footing, we think it is a good time to consider the Yuan. There are two ways to think about a currency investment. For one, it’s a cash investment, often with a yield. As long as you live in the country where it’s issued, currency will typically be stable apart from inflation or deflation. However, most investors don’t live in China. Second, currency investments are made with the hope of appreciation. We believe appreciation in the Yuan is a likely scenario in this environment.

Our reasoning is two-fold: for one, decoupling the Chinese Yuan from the Dollar should tend to push China’s currency up. From 2005 to 2008, the Yuan rose 20% against the Dollar. Secondly, the Chinese government assumes the currency will appreciate with the new policy. The stated goal is to make foreign exports more affordable on the Chinese markets – a move the G-20 applauds.

The best way to invest in the Yuan is through WisdomTree Dreyfus Chinese Yuan (CYB). Unlike other major currencies, the Yuan can’t be traded on the Forex market. WisdomTree’s CYB ETF is an actively-managed ETF currently holding a compilation of futures contracts and swaps with different maturities that seeks to mirror the money market securities denominated in the Chinese Yuan. The fund has seen some upticks lately, with the largest portion of this new upward move occurring last Friday and this Monday. The fund has no current yield, so it is strictly an appreciation play versus the U.S. dollar. To go long the Chinese Yuan, buy CYB. All the best.

CYB Chart

Disclosure covering writer, editor, publisher, and affiliates: Long CYB. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

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