Trading Forex - Renminbi

Author: Mike P. Kulej

Article:
China is making business headlines everywhere we look. It has
the largest population, the fastest growing economy, the biggest
export/import imbalance, most imposing foreign reserves. And, by
many accounts, the most undervalued currency, which is, in part,
the reason behind Chinese meteoric rise as on of world's
dominant markets.

There is some confusion as to the correct name of Chinese
currency. There seem to be two different names used
interchangeably. One is the Yuan, while the other is Renminbi.
Yuan is the measure of account, while Renminbi (RMB) is the
correct name of the currency, meaning "people's money". Even in
Forex circles there is no conformity, as the term Chinese Yaun
(CNY), is still commonly used. Little wonder just about
everybody is confused.

This currency is not a freely "floating" one. Since 1997 until
2005, China maintained a peg of 8.27 to a dollar. In eyes of
many economists and politicians, that was a chief reason for
Chinese staggering trade imbalance, estimated to be over 1
Trillion dollars. The People's Bank of China was under enormous
international pressure to let Renminbi float. In 2005 the bank
moved the peg to 8.11 USD.

Eventually People's Bank of China (PBC) moved to a managed
floating exchange rate based on market supply and demand with
reference to a basket of foreign currencies. The daily trading
price of the U.S. dollar against the RMB in the inter-bank
foreign exchange market would be allowed to float within a
narrow band of 0.3% around the central parity published by the
People's Bank of China (PBC); in a later announcement published
on May 18, 2007, the band was extended to 0.5%.[19] The PRC has
stated that the basket is dominated by the U.S. Dollar, Euro,
Japanese yen and South Korean Won, with a smaller proportion
made up of the British Pound, Thai Bath, Russian Ruble,
Australian Dollar, Canadian Dollar and Singapore Dollar.

As of this writing (late July 2008), RMB is quoted at 6.82 USD.
This represents a 21% appreciation since the removal of peg.
Large move in currency terms. Despite this fact, many studies
indicate that RMB is still severely undervalued, and is expected
to rise in value over coming months and years, against the
entire basket of tracking currencies. How can a trader take
advantage of this appreciation? There is number of
possibilities. The easiest is to enter Chinese equities market
through any ETF exposed to China. There are many of them, with
varied level of both exposure and play. While this approach is
the simplest one, it is also the least direct one when pure
currency movement is sought. Not the best option for Forex
trader.

Another financial vehicle to consider is a Market Vector
Currency Exchange-Traded Note, a form of ETF. Morgan Stanley
issued Chinese Renminbi/USD ETN, which trades under the ticker
symbol CNY. This instrument is supposed to shadow the currency
fluctuation and trade like a stock. It can be purchased through
any stock broker. Just like all of this type of products, it
lacks the the advantages of spot Forex market, namely 24 hour
trading and scalable leverage.

Most appealing option to a Forex trader is to trade Renminbi in
a spot market. Fortunately, this possibility exists, but is
offered by very few brokers. You might have to look around a
little. There are some shortcomings to this option. The spread
is very wide, making day trading prohibitively expensive, to the
point of not being practical. Some periods during trading day
lack liquidity, making it very difficult to get in or out of the
market. If your intention is to take advantage of long term
expected appreciation, you can easily use this option for "buy
and hold".

General long term predictions for Renminbi are calling for
significant gain against the earlier mentioned basket of
currencies. While it might very likely be true, one musn't
forget that China is still a developing country by western
standards. Her financial markets will go through many peaks and
valleys, some of which will surely be prolonged. Renminbi is no
exception and is certain to experience large corrections.

About the author:
Mike P. Kulej is a Chief Forex Strategist for Spectrum Forex
LLC. He specializes in mechanical trading systems as explained
on HREF="http://www.spectrumforex.com">www.spectrumforex.com .
Spectrum Forex LLC offers numerous services to individual
traders. He also publishes trading blog HREF="http://www.fxmadness.com">www.fxmadness.com . With
questions and comments e-mail him at kulej@spectrumforex.com.

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