From the October 01, 2011 issue of Futures Magazine • Subscribe!

Only yuan currency looks strong

Recent market volatility in all sectors has made it difficult to find long-term opportunities that offer value. From a currency perspective, there are few places to park your capital.

In early September the Swiss National Bank pegged the Swiss franc to the euro, stopping the most reliable bull currency trend in its tracks. It seems odd these days to want to be pegged to the euro, but currency appreciation holds its own hazards, and efforts by the Swiss to throw cold water on the franc rally have failed.

Fiat-backed currencies are being rejected. The Eurozone is in trouble, burdened by sovereign debt problems that won’t go away; the U.S. dollar is suppressed by near-zero interest rates, and the Federal Reserve has pledged to keep interest rates exceptionally low (basically zero) through mid-2013.

Commodity-based currencies, the strongest currencies over recent years, are beginning to feel the pain of a global demand retreat — the Australian dollar and Canadian dollar had strong runs, but now appear vulnerable.

This situation confronts the trader with the question: Are there any attractive currencies left?

Yes, there is one — the Chinese yuan.

Economists consider the Chinese currency to be undervalued by as much as 20%. That’s because it’s not a free-floating currency — Chinese policymakers tightly control its exchange rate. They allow it to trade in a tight band against the U.S. dollar, which has remained at a stable 0.5% in either direction. The policymakers keep a tight rein on the currency to keep the country’s export costs low, but the downside to the artificially low exchange rate has been inflation. To combat it, the Chinese have been boosting the yuan’s value slowly. It has risen 7% against the U.S. dollar since mid-2010 (see "Almost free").

In the context of global rejection of fiat currencies, such a slow appreciation is a welcome sign of stability. Yes, there could be dips, particularly if there are pauses in China’s growth, but over the long-term the yuan appears more stable than most currencies, including the dollar, because China is not burdened with the debt load of the West.

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