Tags: david | frazier | china | yuan

Don't Get Too Excited Over China's Yuan Tactic

Monday, 21 Jun 2010 12:38 PM

The People’s Bank of China, or PBOC, announced Saturday that it decided to “proceed further with reform of the RMB (renminbi) exchange-rate regime and to enhance the RMB exchange-rate flexibility.”

In response to that announcement, numerous “news” sources reported that China has decided to ease or lift its currency’s peg to the U.S. dollar. Bloomberg went so far as to state: “China Signals End to Peg.”

Investors responded favorably to those headlines, with the value of the U.S. dollar declining this morning against a broad basket of other major world currencies, and the prices of basic materials (i.e. copper, steel, and coal), which tend to move in the opposite direction of the dollar, rising sharply.

ALERT: Frazier: Stocks Rolling Over. Get Out Now.

The major stock-market indices also rose this morning after certain investors interpreted China’s supposed announcement to suggest that trade relations will improve between the United States and China.

Unfortunately, a closer review of China’s announcement indicates that China has no intention of ending its currency’s peg to the U.S. dollar.

For example, the PBOC stated the following at its website:

• “The exchange-rate floating bands will remain the same as previously announced in the interbank foreign-exchange market.”

• “The basis for large-scale appreciation of the RMB exchange rate does not exist.”

• “The People’s Bank of China will ... maintain the RMB exchange rate basically stable at an adaptive and equilibrium level.” Specifically, the PBOC stated that it will maintain its current ratio of 6.8275 yuans to one U.S. dollar.

In light of the facts outlined above, I urge you to not get too excited about China’s supposed intentions to ease its currency’s peg to the U.S. dollar.

I also urge you to ignore today’s modest rally in the major stock-market indices, which were led by gains in the stocks of companies that operate in the basic materials sector of the U.S. economy.

That is because history suggests that China will allow its currency to appreciate only modestly against the U.S. dollar, and numerous economic statistics indicate that the U.S. economy, as well as numerous foreign economies, will grow at a slow pace during the second half of this year.

I therefore expect the prices of basic materials and stock prices in general to decline during the months ahead.

Note from Moneynews:
If you’d like to be kept abreast of actual economic and financial developments and their longer-term effect on securities prices (rather than relying on misrepresentations like the one discussed above), try a free sample of David’s investment advisory service, The ETF Strategist. As of last Friday’s close, the recommendations had beaten the S&P 500 by a whopping 55 percentage points since its inception on Sept. 18, 2007. Click Here to Find Out More.

About the Author: David Frazier
David Frazier is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He also writes two very successful investment newsletters. Discover more by Clicking Here Now.

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The People s Bank of China, or PBOC, announced Saturday that it decided to proceed further with reform of the RMB (renminbi) exchange-rate regime and to enhance the RMB exchange-rate flexibility. In response to that announcement, numerous news sources reported that...
david,frazier,china,yuan
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2010-38-21
Monday, 21 Jun 2010 12:38 PM
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