What Are The Prospects For CYB Going Forward?

Summary

• The CYB ETF has declined by about 8.60% since April 2018.
• The recent truce announced in the US-China trade war has helped lift the Yuan, however it could prove to be temporary.
• The Chinese economy continues to weaken, which will encourage further dovish monetary policy from the PBOC, and weigh down the CYB ETF.

The WisdomTree Chinese Yuan Strategy ETF (NYSEARCA:CYB), which tracks the Chinese Yuan against the US Dollar, has declined by about 8.60% since April 2018. The main reason behind this slide has been the ongoing trade tensions between the US and China. Nevertheless, the ETF has actually rallied over the past week by about 1.80%, mainly due to the US Fed striking a more dovish tone towards monetary policy, which led to the USD weakening against the Chinese Yuan. Recent positive developments the US-China trade war could also provide support for the Yuan. However, this article assesses whether the rally is sustainable.

Source: Yahoo Finance

Prospectus Review:

The investment seeks to achieve total returns reflective of both money market rates in China available to foreign investors and changes in value of the Chinese yuan relative to the U.S. dollar. The fund normally invests at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in investments whose combined performance is economically tied to China. It is an actively managed exchange traded fund. The fund generally will maintain weighted average portfolio maturity of 90 days or less with respect to the money market securities in its portfolio. The annual net expense ratio of the ETF is 0.45%

Source: wisdomtree.com

Risk Note: Investors should be aware of the possible contango effect risk regarding such derivative-based ETFs. The risk occurs during rollover periods. If the price of forward contracts (which the fund will purchase and roll into) is higher than the spot price (which is usually the approximate forward price of the existing forwards that the fund will be selling out of), then the ETF investors will incur a loss as result of the transaction.

The reason I have distinctively chosen this ETF is because according to data from ETFdb.com, it has the highest level of Assets Under Management and also has the highest daily average trading volume. Hence, this ETF offers the best exposure to the Chinese Yuan from a liquidity perspective, which makes it less risky compared to other Yuan-based ETFs.

US-China trade war relief

At a meeting during the G-20 Summit, the US and China have decided to call a 90-day truce, during which both countries agree that no more tariffs will be placed on each other’s goods. Moreover, during this time the two nations aim to discuss and resolve trade issues including the negative trade deficit of the USA with China and the theft of technology-related intellectual property by China. While no major trade resolution was made, the fact that the two countries are making some sort f progress towards resolving their differences is seen as a positive in the market. This would also ease the pressure on the Chinese economy, which has been suffering a severe slowdown over the past year. Therefore, the Yuan will be supported by this development, and consequently drag the CYB ETF higher as well.

Weakening Chinese economy

While trade tension worries may have eased over the past week, the Chinese economy has been vastly weakening over the past year. In fact, NBS Manufacturing PMI data that released on Nov. 30, 2018 showed a reading of 50, missing the consensus estimate of 50.2. Moreover, the index has been on a downward trend since May 2018, as shown by the chart below. If the index were to fall below 50 in the next month, it would indicate economic contraction in the manufacturing sector.

Source: Trading Economics

Making matters worse is the fact that the Non-manufacturing PMI also declined, delivering a reading of 53.4, which missed the consensus estimate of 53.8, and is also well below October’s reading of 53.9. In fact, business sentiment is also sliding, coming in at 54.2, thereby missing the consensus estimate of 56.4.

The ongoing economic weakness will encourage the People's Bank of China (PBOC) to maintain accommodative monetary policy conditions to support the economy, which will inhibit the Yuan from rallying much further.

While business sentiment and the economy could pick up once this trade dispute is resolved, there has not been any concrete solution offered yet on either side. Hence the recent rally in the Yuan could prove to be more sentiment-driven, given that there has been no genuine ‘trigger’ to boost the Chinese economy.

Dovish US Fed

The CYB tracks the Chinese Yuan against the USD, which has recently been weakening as a result of a shift towards more dovish monetary policy. This allowed the CYB ETF to rally by 1.80% over the past week. However, I do not recommend buying into this rally, as it may prove to be more short-term amid China’s ongoing economic troubles, which will continue to weigh down the Chinese Yuan.

Bottom Line

The trade dispute between the US and China this year has dragged the CYB ETF down by 11.21%. While there have recently been some positive developments regarding this issue, I do not recommend buying into the ETF at this moment. Any new trade deal emerging between the two nations is still far-fetched, while the Chinese economy continues to weaken. Only once we obtain more concrete solutions to the trade dispute and China’s economy shows more promising signs of picking up steam would I recommend considering buying long positions on the CYB ETF.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.