China Tells

Since the announcement from PBOC to de-peg RMB from USD, the market has been excited about the movement of RMB. In fact, since June 18 when the announcement was made, RMB has appreciated a whopping 0.87% from 6.83 to 6.77 during a very short period of 22 days. Based on such pace, RMB will appreciate 14.5% in 12 months, taking the exchange rate to a new elevated level of 5.83.

No market player has ever made any agressive expectation of the appreciation of RMB on the above scale. In fact, the appreciation pace in the last three weeks already exceeded most commentators’ expectation, with a mean annualized expectation of RMB to appreciate around 2% to 4%. Does it mean that the Chinese government has caught the speculators again, and it is time to jump on the one way sure win trade?

It is Chinatells’ belief that to trade RMB (through NDF market) is never a high quality bet from a speculator’s perspective. To start with, RMB is one of the most heavily managed currencies in the world. As a natural result, any fundamental analysis based on the economy and international finance to value the RMB is a waste of time. To trade RMB, one is literally trying to read the mind of Zhong Nan Hai. Secondly, the movement of the RMB, even the intra-day movement, is so managed that there is not even much noise or rumor to trade. As a comparison, some other heavily managed currencies, such as TWD or SGD, offers a relatively more flexible platform for speculating (even though the central banks of Taiwan or Singapore are also an active player on the FX market).

Given such a framework, the future direction of RMB, is almost certain to have a two way risk in Chinatells’ view. It is Chinatells’ strong belief that there is no such a purely free float currency in this world per sei. All the central banks make effort to manage their currency, but to different degrees and under different mechanisms. Sophisticated and powerful central banks, such as FED and BOE, tend to try to influence currency through a more market-like approach, such as adjusting the interest rate or open market operation. Other governments make the life of a central banker easier by pegging the currency at a fixed rate. Given the high sensitivity of RMB, it is foreseeable that RMB will continue to be managed as a powerful political tool between Beijing and Washington to achieve some sort of compromised balance, so that both parties can obtain what they mainly want by sacrificing something else. For Washington, the immediate priority is the mid-term election in November. In Chinatells’ base case scenario, Beijing will allow an agressive appreciation of RMB (if Euro stops depreciating more against USD) until Nov, after which we are likely to see a reversal of RMB to give back some of the gain during the second half of the year.

On the other hand, however, it is worth noting that the above base case is purely based on Chinatells’ reading of political power balancing between Beijing and Washington, which is in itself highly opportunistic and subject to change. After all, in a lot of times, even politicians themselves are not 100% sure to manage the situation under full control. By November, there are still quite possibly a few blowout, such as the European debt crisis, Korean peninsula tension, and Iran nuclear aggression that could change the political dynamic, in any of which above cases RMB could well be utilized as a stake on the negotiation table. It is exactly for this reason that Chinatells would advise speculators not to put too much time in speculating such a seemingly free lunch on the table.