Will the Year of the Pig rein in Chinese yuan bulls as the seasonal boost ends and trade war reality kicks in?
- Neal Kimberley says despite the Chinese currency’s strong start in January, the uncertainty over US-China trade negotiations and the possibility that Chinese exporters were behind seasonal demand for the yuan should give investors pause
Indeed, some likely drivers of the yuan’s early January rise may prove short-lived.
Investors who are already “on the trade” will be mindful of managing their exposure. It’s never wrong to take a full or partial profit on a position. As for those investors who missed the initial move but now feel 2019 will indeed see a broadly lower US-dollar-to-Chinese-yuan exchange rate, it might be advisable to take a moment to reflect.
Initial yuan appreciation in the first days of January arguably triggered a snowball effect as investors, for fear of being left behind, felt compelled to pile into the renminbi.
German Economy Minister Peter Altmaier even felt it necessary to state last week that “Germany is not currently at the beginning of a recession.”
On a comparative basis, and with all foreign exchange trades being a decision based on the perceived merits of different currencies relative to each other, the arguments in favour of the yuan over, in particular, the US dollar start to build up.
But the trade negotiations are themselves a double-edged sword. Market expectations of a successful outcome to those talks have been rising and that has arguably fuelled yuan demand, just as the deterioration in China-US trade relations last year fed into renminbi weakness.
There is therefore a real, if unquantifiable, risk that any setback in the current trade negotiations will seriously undermine the short-term case for yuan strength.
There is also the possibility that the pace of early-2019 yuan strength has been built on speculative demand but also on seasonal factors. The impact of the latter may soon fade.
With the Year of the Pig beginning on February 5, and given the duration of the public holidays in China, it would be perfectly rational to expect Chinese exporters, who naturally convert overseas revenues into yuan, to have been front-loading their hedging activities. Once the Spring Festival is over, those exporters may revert to a more normal pace of operations.
There are persuasive arguments in favour of yuan appreciation versus the US dollar in 2019, and early January has already seen the renminbi achieve a material rise versus the greenback. But that rise has been sustained by a combination of speculative and seasonal demand that may not persist.
At current levels, yuan bulls might wish to proceed with a degree of caution.
Neal Kimberley is a commentator on macroeconomics and financial markets