The Chinese government has been warning bears not to bet against its currency. But the bears didn’t listen and they’re not very happy right now. While some of them have seen their options expire worthless, others still have short positions with no intention of paring them. Since most events take longer to play out than expected in currency markets, it’s still too early to tell who is on the correct side of this trade. Below are several important opinions to consider.
Yuan Bulls
Hilmi Unver, a Swiss money manager and head of alternative investments at Notz Stucki & Cie, makes the following point: “China wants to have control over the yuan and will do whatever it can to ensure that no one else decides what direction it goes in. Is it worth fighting against a huge economy and policy maker that can take you out? No.” (For more, see: Why is the Chinese Yuan Pegged?)
China’s currency reserves have declined $790 billion since June 2014, but at $3.2 trillion this is still three times larger than any other country. As Patrick Robert Chovanec of Silvercrest Asset Management recently pointed out, China is not a debtor country and therefore will not have to contend with a currency crisis. According to Chovanec, the Chinese secretly wanted the yuan to depreciate versus the U.S. dollar, which is why it moved to a basket of currencies, assuming that Federal Reserve interest rate hikes would lead to U.S. dollar appreciation. If the yuan depreciated, then it was expected to help the Chinese economy. The trick is that China still wants to remain competitive in the currency market, so it can’t allow the yuan to depreciate too much. In order to ensure depreciation wouldn’t go too far, the Chinese government has limited capital outflows and used announcements to restore confidence in the currency. The yuan has also appreciated because the prospects for numerous Fed rate hikes in 2016 have diminished. This has hurt the U.S. dollar, which has helped the yuan.
The next opinion doesn’t belong to a yuan bull, but someone who is not as bearish as most people. He’s warning others not to be too bearish on the yuan. His opinion should be considered because he has been the best yuan forecaster over the past year as tracked by Bloomberg. His name and role: Roy Teo, senior strategist at ABN Amro Bank. His warning related to the yuan: “Anyone hoping for another major devaluation will be disappointed.” However, Teo expects the yuan to slide 3% by the end of the year. (For more, see: How Undervalued is the Yuan?)
Yuan Bears
With the Chinese economy growing at its slowest past in 26 years and exports plunging 25% in February, some investors can’t figure out why the yuan is holding up. Those potential reasons were given above, including a Federal Reserve that’s less hawkish than expected and China’s large reserves. These conditions don’t sway all yuan bears.
Crescent Capital made a bearish bet on the yuan two years ago. It’s holding on though, as it believes the yuan could decline by as much as 70% over the next two years.
Bill Ackman of Pershing Square Capital Management reported to investors in January that its bearish yuan bets had failed. (For more, see: Chinese Yuan an Unlikely Reserve Currency.)
Adam Rodman, hedge fund manager at Segra Capital Management, has no intention of paring down his short yuan bet as he expects the currency to depreciate over the next 18 months.
Sue Trinh, head of foreign exchange strategy at Royal Bank of Canada (RY) in Hong Kong, simply stated that the yuan is overvalued versus the U.S. dollar.
The Bottom Line
The yuan bulls have been correct so far. The yuan has appreciated 1.6% since January 7, but there is no telling how it will play out. (For more, see: How to Buy Chinese Yuan.)
Dan Moskowitz does not have any positions in the yuan.
