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Yuan Keeps Gaining With Phase One Deal on Jan. 15

FX_IDC:USDCNY   U.S. Dollar / Chinese Yuan
President Trump's trade war against China was one of the dominant stories in financial markets over the course of 2019. But now an important currency is moving as it fades: the Chinese yuan.

This chart shows the U.S. dollar against the yuan, so price drops are bullish for the Chinese currency.

It shows the yuan has been gaining against the greenback since early September, right around the same time that Beijing agreed to trade talks in Washington. That marked the "beginning of the end" for the tensions.

The People's Bank of China controls the yuan, so it's not much of a trading vehicle. However, it's had a strong historical correlation with Chinese equities in the past:
-USDCNY fell sharply between mid-2005 and late 2008. The iShares China Large Cap ETF surged over the same period.
-USDCNY started to climb in mid-2015, corresponding to a selloff in FXI .
-USDCNY fell sharply between May 2017 and April 2018. Chinese stocks, especially tech companies like Alibaba , surged.

Another trend is China's attempted shift from manufacturing center to financial hub. This has entailed domestic financial reform (most of it forgotten amid the trade war). Second, indexing companies like MSCI are boosting allocations to China, potentially channeling billions of dollars of additional capital into its domestic stock markets.

That kind of transformation also goes hand-in-hand with a stronger yuan.

Just today the White House announced a January 15 signing date for Phase One of its trade deal with China. This creates the potential for further bullishness toward China in the New Year -- especially given the weakness in the U.S. dollar.

In conclusion, we don't yet know what the New Year will bring. But USDCNY could be a useful indicator which way things are going. Make sure to follow our ideas for potentially actionable China-related ideas 2020 based on this trend.

Comments

Great analysis. I learned a lot from this one!
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