Since August 2012, the Chinese yuan strengthened and the Japanese yen weakened considerably. The yuan trades at record highs against the yen. Given the negative impact of a strong currency on exports, China should seek to weaken its yuan against its neighbor’s yen.
Since the Chinese yuan was allowed more freedom to move in 2010, it has essentially strengthened against the U.S. dollar. There was pressure from the U.S. to allow the yuan to reflect the economic strength of the Chinese economy.
The yuan’s strength, which is shown on the chart as weakness of the U.S. dollar against the yuan, came to an end in January 2013. But the recovery of the dollar/yuan noticeably lagged the rally of dollar/yen.
Japan had never been squeamish about loving an export-boosting and deflation-fighting weak yen. So traders didn’t really pay much attention to Japanese Prime Minister Shinzo Abe’s apparent concern about the negative economic impact of the currency’s recent weakness.
The yen is now trading at an over six-year low against the dollar. While the two economic giants might have different fundamentals on their agendas, the reality says that weak currencies are needed for exports.
The cross between the Chinese yuan and the Japanese yen is trading at 17.77. The two components should converge, with the yuan weaker and yen stronger. However, only a convincing close below the 21-week , currently at 16.95, would signal that this FX re-convergence is actually under way.