Exchange traded funds following the price movements of the Chinese yuan currency may be allowed a little more wiggle room as the People's Bank of China loosens the trading restriction on its currency.
The PBoC has doubled the daily trading band to allow 1% moves from the yuan's daily fixing - the daily trading band had been limited at 0.5% since May 2007, according to Bloomberg. The yuan, though, has been weakening lately as a result of ongoing Eurozone debt concerns and a potential slowdown in the Chinese economy.
The flexibility will allow the central bank to better control inflation and support its slowing economy, which the World Bank expects to expand 8.2% this year. The announcement may also mitigate some criticisms of Chinese currency policies.
"The yuan is weaker as investors are again worried about Europe and a bit on China's growth," Tommy Ong, senior vice president of treasury and markets at DBS Bank, said in the article. "It's an opportune time for China to widen the band when appreciation expectations aren't so strong. That won't induce any massive speculative bets on its currency."
The yuan dropped 0.19% to close at 6.3150 per dollar in Shanghai Monday, the largest decline since April 5.
"The move is not likely to have an immediate or large impact on the yuan," Nizam Idris, head of foreign-exchange strategy for Asian markets at Macquarie Group Ltd., said in the article "The decision underlines China's confidence that the economy is on a sound footing. We maintain the view that the yuan will continue to see pressure for appreciation."
Idris projects the yuan will hit 6.10 to the dollar at the end of 2012, or a moderate 3.2% appreciation for the year. The yuan has been strengthening an average 4.4% over the past five years, but has dropped 0.1% so far this year, the third-worst performing currency in Asia.
Investors may access the Chinese currency through exchange traded products:
- WisdomTree Dreyfus Chinese Yuan Fund ETF (CYB)
- Guggenheim CurrencyShares Chinese Renminbi Trust ETF (FXCH)
- Market Vectors Chinese Renminbi/USD ETN (CNY)
Max Chen contributed to this article.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.