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

Only yuan currency looks strong

Martin Feldstein, Harvard economics professor and National Bureau for Economic Research president emeritus, noted in a recent article that the yuan (renminbi) is likely to rise. "The Chinese government has been reassuring its domestic manufacturers that it will not let the renminbi jump sharply as some foreigners have advocated. But it also has made it clear that the renminbi will continue to rise and it has advocated that its manufacturers shift production to products for the domestic market," Feldstein wrote. "The increased domestic spending in China will increase demand and raise inflationary pressures in two ways: ... A stronger renminbi will reduce the demand for those products and therefore limit that source of inflation [and] also reduces import costs, including the costs of raw materials that are used in Chinese production."

How can you participate in the Chinese yuan? One way is to buy into the Wisdom Tree Chinese Yuan exchange traded fund (CYB) or the soon to be listed (mid-October) CME Group yuan FX futures. The CYB is designed as an easy way to invest in changes in the yuan’s value. It has seen a steady appreciation over the past year, though with more volatility (see "A liquid alternative").

But that’s not the only attraction; this ETF also has an options-chain. This means traders can be more flexible and apply options-based risk management to their investment in the yuan. They can execute tactics like covered call combinations, collecting income by writing call options with higher strike prices.

While many experts believe the Chinese yuan will become the world’s reserve currency eventually, it doesn’t have to in order to appreciate. The bottom line is that in the current global currency chaos, the Chinese yuan looks stronger than most currencies and most likely will continue to get stronger.

Abe Cofnas is the author of "Sentiment Indicators" and the forthcoming "Binary Option Trading: Strategies and Tactics" (Bloomberg Press). He can be reached at abecofnas@gmail.com.

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About the Author
Abe Cofnas

Abe Cofnas is author of “Sentiment Indicators” and “Trading Binary Options: Strategies and Tactics” (Bloomberg Press). He is editor of binarydimensions.com newsletter and can be reached at abecofnas@gmail.com.

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