Chinese Yuan WisdomTree Vs USD Bull Run – Who's Stronger?

Whether the $ maintains its strength or not, the Yuan/USD relationship presents relative stability in an ocean of currency volatility.

The Bull Run on the US dollar has dominated most discussions in the currency world. Recently, the strong dollar has begun to even generate foreign exchange losses among multinational corporations as their earnings abroad get discounted by converting into US dollars at reporting times. Furthermore, expectations of a lift- off in interest rates, makes the Bull seem unstoppable. It appears one cannot escape the Bullish sentiment wave of the US dollar.

But that is a wrong assumption when one considers the Chinese currency, the Renminbi, also known as the yuan. Since the Chinese own 1.2 Trillion dollars worth of US Treasuries, the future value and stability of the Chinese currency and US dollar is of paramount importance.

Let’s take a closer look at the CNY/US dollar relationship.

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A stronger US dollar should, in theory, be able to buy more Chinese currency. On July 1, 2014, the DXY closed at 79.815  and on April 30, 2015 it was 94.679. This represents an increase of 18.7%. In contrast, the RMB on July 1, 2014 was 6.2013 and on April 30th 2015, it was 6.2032. Virtually no change at all. Let’s look at a 5-year price path of the CNY/USD pair. On June 11, 2010 the CNY/USD pair was worth 0.14635  (14 cents). On April 29 a CNY/USD was worth 0.1613, an increase of 10.2 percent. The value of the CNY against the USD dollar has not increased since January 2014 and has been in a small range.

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However, there have been times during this same period where the spread between the DXY and the RMB has been wider. Bloomberg data shows that the average spread between the DXY and the CNY was from April 30, 2013 to April 30, 2015, -78.2 points. On April 30 it was -88.4 points, just 10 points off the average. On May 6, 2014, the widest spread occurred  at -72. points .

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We can see that for an individual trader, the trading opportunities in the spot CNY market are not there unless significant amounts of money are traded to capitalize when the spread widens. An EFT that focuses on trading the yuan variations might be a better alternative to consider. Let’s take a look at one ETF – The WisdomTree Chinese Yuan Strategy (CYB). In the case of CYB we can see that this year it has been able to improve its performance and it’s probing a new high.  However, it isn’t an easy task.

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Whether the US dollar maintains its strength, or not, the Chinese yuan/dollar relationship presents an example of relative stability in an ocean of currency volatility. In Shanghai today, a double expresso costs 19 yuan or RMB. This translates at a current spot rate of 6.20 CNY to the dollar to $3.06. In the United States, a double expresso or Doppio, as it is known, costs $2.12. The Chinese currency would appear to be overvalued. If it was allowed to flout, the cost of that double expresso at Starbucks, all things being equal, would be close to the US price.  Yet-Don’t bet on much of a change.

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