Once Upon a time (till 2013) – one of the safest and stable trade: Long Chinese Yuan. It was a safe and predictable trade that worked since 2005. This is USDCNY chart…declining trend shows appreciating Yuan.
The yuan rose 35%+ since currency reforms were first announced in July 2005. The Logic was simple: Chinese Yuan highly undervalued currency and has a long way on its way up. This is USDCNY between 2010 and 2013. Again a declining chart means appreciating Yuan
Chinese Yuan rose nearly 2.91% against US dollar in 2013. Now remember, the fall of emerging markets currencies was one of the big market themes of 2013 - Year of taper tantrum but there was no such concern when it came to Yuan
Peak Confidence in Chinese Yuan by Dec 2013
The sun will rise in the East. The New York Yankees will make the playoffs. The yuan will strengthen against the dollar ~ CNN
Everybody was super confident on Chinese Yuan. It was a no-brainer trade: Investing in undervalued currency with promising growth prospect. You park your money in China and you get relatively high-interest rates plus appreciating currency. It’s like investing in a up trending stock that gives good dividend.
"The yuan will not reverse its momentum of steady appreciation" ~ Liu Dongliang in 2013
Then 2014 started like this
Sharp depreciating move in Chinese Yuan. It looked like the depreciation was engineered to burn the fingers of speculators
What people forgot: The government controls the foreign exchange rate. Chinese Central Bank decided to kill the carry trade speculators (Short Dollar and Long Yuan traders)
The big story of 2014: How much Chinese Yuan has depreciated this year. This is big considering Chinese control pic.twitter.com/PrclAzerI2
— Deepak Singh (@smarket) April 25, 2014
When things have to go wrong, they go wrong at the worst possible time. The Murphy Law attacked Yuan Bulls. Chinese economic engine started stalling and depreciation started making sense.
China then stunned the world’s financial markets in August 2015 by devaluing its currency on back of poor export performance. There was 8% fall in exports in previous month and it was becoming a trend.
What started as small trend change - became a bigger trend as the time progressed. The trade reversed. China which at one point of time was struggling with too much inflows - started fighting with capital outflows. Chinese threw everything at it...lost almost a trillion dollar of reserves.
This is how USDCNY looks like since 2014
No Trend lasts forever. The trend can change even when fundamentals look compelling. Remember 2013...when everything looked good for CNY appreciation.
So, remember we are dealing with market where you never know.
Science of Stock Price Action Video Book: smarketpremium.com
Science of Stock Price Action is a training course designed to help you understand the price action mechanics with Live case studies and real life applications. It's not a recommendation service but help one understand this fascinating world of how price action results in a sustained trend.
Do you want to Learn Science of Stock Price Action with more Live case studies covering Indian and Global stocks - www.smarketpremium.com
Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purpose. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers