The Chinese Yuan recently broke through the 7.00 level in the spot market. The 12-month non-deliverable forward contract, priced at 6.2864, is looking for over a 10% gain from here. My ability to pursue certain opportunities in the US markets is now being thwarted because I refuse to exchange my CNY into USD.

This chart also explains why the various QDII programs have been abysmal failures — few Chinese are foolish enough to invest abroad given the undervalued yuan.

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All posts mentioning non-deliverable CNY forward contracts

Here’s a look at my currency monitor within LaunchPad. You can see that I’ve embedded a scrollbar in the chart and can quickly look through all the currencies in the linked quotesheet to the right. It’s pretty slick. On the bottom I have a news ticker for the symbol I’m looking at. (Assuming you can read Chinese, note that the Chinese translations of the Bloomberg headlines appear up to 20 minutes behind the English ones.) The Chinese Yuan is rapidly approaching 7.0000 — still grossly undervalued of course.

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Dollar’s Moves Force Whispers of `I’ Word; G-7 Frets

“After the Federal Reserve’s U.S. Trade Weighted Major Currency Dollar Index declined to 69.2631 on March 18, the lowest in 37 years, Hans-Guenter Redeker, global head of currency strategy in London at BNP Paribas SA, said he sees parallels between now and 1995. That was last time central banks stepped in to arrest a slide in the greenback by purchasing and selling currencies to influence exchange rates.”

Here’s the Euro:Yuan monthly chart which may be putting in an important top?

Click to enlarge (EUR:CNY, Monthly Chart)

I’ve flipped the chart here for easy reading. :)

Click to enlarge (EUR:CNY, Monthly Chart)

James Bond fans will remember that SPECTER stood for SPecial Executive for Control, Terrorism, Extortion, and Revenge (reverse the last two if you use the British spelling). Don’t worry, I’m not a loon… just a fan of Bond.

Thanks to reader “Charlie” for hipping me to the Market Vectors Chinese Renminbi/USD ETN. I read the four pages of risk factors (”a non-exhaustive list” though certainly repetitive) in the prospectus. Key bit:

“The exchange rate between the Chinese RMB and the U.S. dollar is managed by the Chinese government with reference to a basket of currencies and is based on a daily poll of onshore market dealers and other undisclosed factors [ed. which may or may not include consulting a feng shui master].

The People’s Bank of China, the monetary authority in China, sets the spot rate of the Chinese RMB, and may also use a variety of techniques, such as intervention by its central bank or imposition of regulatory controls or taxes, to affect the Chinese RMB/U.S. dollar exchange rate.

In the future, the Chinese government may also issue a new currency to replace its existing currency or alter the exchange rate or relative exchange characteristics by devaluation or revaluation of the Chinese RMB in ways that may be adverse to your interests.

The exchange rate is also influenced by political or economic developments in China, the United States or elsewhere and by macroeconomic factors and speculative actions. To the extent that management of the Chinese RMB by the People’s Bank of China has resulted in and currently results in trading levels that do not fully reflect market forces, any further changes in the government’s management of the Chinese RMB could result in significant movement in the value of the Chinese RMB.

Changes in the exchange rate result over time from the interaction of many factors directly or indirectly affecting economic and political conditions in China and the United States, including economic and political developments in other countries. [ed. You already said that… lawyers bill by the hour, never forget.]

How’s that for a Cover-Your-Ass passage?

Reader “Rod” has commented on his difficulties beating the “roll yield” while long the CNY futures — this ETN faces the same challenge, I believe.

Dollar Trades at Record Low Versus Euro as Fed Plan Disappoints

“Goldman Sachs analysts said in a report that ‘we are not convinced that yesterday’s move will solve all the multiple challenges facing credit markets and the financial system.’”

Everyone knows that Gentle Ben’s bank bailout / reflation plan is murder on the dollar. I thought it would be fun (eye-opening?) to post the charts of crude oil and gold, denominated in dollars, euros, and yuan, so here they are:

Click to enlarge (US Dollar Index)

Click to enlarge (Crude Oil, Dollar-denominated)

Click to enlarge (Gold, Dollar-denominated)

Click to enlarge (Crude Oil, Euro-denominated)

Click to enlarge (Gold, Euro-denominated)

Click to enlarge (Crude Oil, Yuan-denominated)

Click to enlarge (Gold, Yuan-denominated)

Here’s the monthly chart of the US Dollar Index since 1985. You can see that back in ‘85 it was at 164.72. The DXY hit a new low of 74.07 this month — that’s a 55% drop. More recently, back in early 2002, the Dollar Index traded above 120 — that’s around a 38% drop from there in only six years.

Click to enlarge (US Dollar Index, Monthly Chart)

My recent trip back to the US further strengthened my conviction that the US is in terrible secular decline — I couldn’t seem to get away from overweight, undereducated people; the divide between the rich and poor is growing even more stark; and the middle class appears to be disappearing. I also had one brush with the new “police state” which I’ll write about in a later post. I’d be very depressed if I weren’t earning CNY, didn’t own a home in China, and hadn’t diversified over half of our assets out of the dollar many years ago.

Click to enlarge (Chinese yuan, Monthly Chart)

Related:

The Wind at One’s Back: Long Crude, Short Dollars - November 22, 2007
Bundchen, Avoiding Dollars, is No Dumb Blonde - November 5, 2007
Rufiyaa Times for the US Dollar - October 29, 2007
Cancel the Trip to Europe — DXY Officially in No Man’s Land - September 29, 2007
Dollar Index Entering No Man’s Land - September 20, 2007
US Trade-Weighted Dollar Index at All-Time Lows - August 8, 2007
Checking on the Doomed Dollar - July 25, 2007
US Dollar Index - Bearish Any Way You Look At It - April 12, 2007
Slip Sliding Away - November 29, 2006
Buffett Cuts Dollar Short Just As Slide Set to Resume - August 7, 2006
Nothing Can Save the US Dollar - July 11, 2006
Trading with the Trend: US Dollar Index - May 12, 2006
The US Dollar Resumes Its Slide - April 29, 2006

Good interview with Joseph McNay in this week’s Barron’s. He pounds the table for gold (GLD), the gold mining companies (GDX), and the “whole medical-pharmaceutical-biotechnology area.” 95% of the value of Barron’s lies in the weekly interview, where people talk their book (just ask a subscriber or a freeloader).

“The Federal Reserve has been… increasing the money supply at a much faster rate than people realize, near a 15% annual rate of increase in M3 … Increasing the money supply… decreases the value of our currency on a consistent basis and sometimes at an accelerated rate … The decline in the value of our currency is directly inflationary: Lost purchasing power is inflation. The bigger risk is that, at some point, the large holders of U.S. dollars may decide they want a lot less of them, if any. This is a very challenging set of conditions for us.

We are denigrating the value of our currency at a much faster rate than we have in the past. The government is running a $250 billion to $400 billion deficit, and our balance of trade is running at a $700 billion or $800 billion deficit. This has all created money at a rate faster than we produce and means that we are further in debt and the value of our money falls faster. One has to come to decisions on how to protect the value of money. Cash is king in the minds of some people. But the biggest question associated with that decision is what currency do you keep your cash in?

I would rather own the Chinese currency than the U.S. currency. As they revalue upwards, it’s a growth investment and it gives protection against losing purchasing power, and that is what we are all facing.”

I agree and have put my money where my mouth is (on the CNY) for a very long time. And let us not forget our precious pandas.

Here’s the daily chart for the Chinese Yuan (spot) in 2007:

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And here’s the daily chart for the 12-month non-deliverable forward contract for the Chinese Yuan in 2007:

Click to enlarge

The CNY appreciated around 6.6% against the USD in 2007 and I expect it will appreciate at about the same rate in 2008. (NDF traders are expecting slightly more.)

Good bit from an interview with Ray Dalio (a guy who gets it) in this week’s Barron’s:

“Our situation today is a modern-day version of the time before the Bretton Woods breakup. It is very much analogous to 1968, ‘69, and ‘70, a period in which we had large imbalances, a fixed exchange rate, and Japan and Germany bought our bonds, and then there was a rebalancing. China today is similar to Japan then, in transition from being an emerging economy, except it is about eight times as large. The imbalances are only going to increase, and there’ll need to be an adjustment for that. This will lead to depreciation in the value of the dollar relative to emerging countries’ currencies, particularly those in Asia.”

Correct.