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MARKET SIGNALS-Playing a Chinese yuan revaluation across assets

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littlekracker


MARKET SIGNALS-Playing a Chinese yuan revaluation across assets



2010-04-16 10:52 (UTC)

SINGAPORE, April 16 (Reuters) - As the day when China will unleash its currency from a 20-month old virtual peg draws closer, investors are picking trades that can profit the most from any yuan revaluation.

The most obvious candidates are Asian currencies with a close correlation to the yuan, commodities and resource-linked companies which benefit from strong growth in China, as well as importers in China.

But picking the perfect proxy trades for a yuan revaluation is complicated by several factors, the main one being that many of these markets have already priced in such a move to a large extent, leaving them susceptible to profit-taking.

Second is the uncertainty over whether the yuan's gains will be moderate and whether the People's Bank of China decides that a yuan appreciation precludes the need for big interest rate rises later this year to quell inflationary pressures.

Many economists expect Beijing will start to allow the currency to move more freely against the U.S. dollar later this year, though it is likely to ensure appreciation is gradual.

RINGGIT MOST CORRELATED

While's China's onshore markets are out of bounds for most foreign players, the non-deliverable forwards are unattractive because of the dollar discount already priced into those forwards and the heavy loss if the yuan does not move. Already the 3-month NDF is pricing in a 4 percent annualised appreciation in the yuan.

Given those constraints, speculators tend to position for a yuan move by going long currencies such as the Malaysian ringgit and Taiwan dollar, or through options in low volatility currencies such as the Taiwan dollar.

The Taiwan dollar and Korean won are also cheaper in trade-weighted terms than their peers, if you compare the movement in the past 7 to 8 years. But investors need to bear in mind that while other Asian currencies continued to rise in 2005 after Beijing's July yuan revaluation, the Taiwan dollar retreated sharply until the end of that year. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

For a chart on correlations between Asian currencies and the

yuan, click:

http://graphics.thomsonreuters.com/10/04/AS_CRRNDF0410.GIF

For a chart of Asian real-effective-exchange rates, click on:

http://graphics.thomsonreuters.com/10/04/AS_REER0410.gif ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

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