y2theudi's  Instablog

Short the Dollar and long the Yuan (using the Australian Dollar as a proxy).  With an imminent QE 2 as promised by the Fed, the Dollar will continue to weaken as a result of the increase in money supply.  Bernanke’s unyielding commitment to preventing the United States from entering a deflationary spiral could potentially mean a third QE, thus further weakening the Dollar.  While the Yuan remains relatively weak as a result of the Chinese government’s persistence in keeping its currency pegged to the dollar, it is currently under pressure from China’s huge current surpluses and growing international criticism.  Thus, the Yuan will inevitably begin to appreciate in the future.  Until then, the next best trade is to long the Australian Dollar because the two economies are closely related, as Australia has greatly benefitted from its trading position with China.  Using these same arguments, it becomes easy to think the Japanese Yen is in a similar situation, if not even better. However, to prevent Japan from experiencing negative GDP growth and deflation, the BOJ must depreciate the Yen to make its products competitive in the global market.  On the other hand, the Australian currency is more market oriented and has great potential to appreciate.