Vincent Fernando, CFA
June 22, 2010
Imagine the global shock should a freely-floating yuan plummet in value against the U.S. dollar. The People’s Bank of China has emphasized that yuan reform doesn’t mean the currency will necessarily appreciate, even though the vast majority of people, including market consensus as shown by forwards, believe so.
After the initial surge post yuan-reform announcement, the yuan just dropped like a rock relatively speaking:
The yuan declined 0.2 percent to 6.8111 per dollar as of 10:17 a.m. in Shanghai, from 6.7976 yesterday, according to the China Foreign Exchange Trade system. That was the biggest loss since December 2008. It strengthened as much as 0.1 percent to 6.79 earlier today.
This drop is despite the fact that the yuan’s reference rate was changed to represent a stronger yuan:
The yuan‚Äôs reference rate was set at 6.7980 per dollar, compared with 6.8275 yesterday. The 12-month non-deliverable yuan forwards climbed 0.2 percent to 6.6304, implying traders are betting on a 2.7 percent appreciation.
Yes, this could just be normal volatility, and we’re not prepared to bet that the yuan’s long-term path is weaker vs. the dollar, but one has to admit that if there’s any single market opinion right now that is nearly unanimous it is that the Chinese yuan is undervalued.
Broadly held market views, such as the old ‘housing prices will always go up’ are downright disturbing even when we feel they make sense.
This article was posted: Tuesday, June 22, 2010 at 4:13 am