Currency ETFs: Chinese Yuan

Includes: CNY, CYB, FXCH
by: Tom Lydon

The Chinese yuan has been artificially weakened against the U.S. dollar as China engaged in a decade long export-driven strategy for economic growth. However, China is beginning to shift towards domestic expansion, and the yuan, along with the currency related exchange traded funds, may finally appreciate closer to a fair market value.

China is beginning to adopt policies toward focusing on domestic growth, as demand for Chinese exports have weakened following the 2008 financial downturn, according to a Barclays research note.

Consequently, the total trade imbalance between China and the U.S. has dropped to between 40% and 50% of the total U.S. trade deficit from up to over 80% before 2008.

"We can take this as evidence that, while the two countries' trade-weighted exchange rates may now be closer to 'fair value,' the Chinese currency is still undervalued relative to the U.S. dollar," Barclays said in a note.

Since 2008, the Chinese government has allowed the renminbi to appreciate against the U.S. dollar at an annual rate between 2% and 3%.

In mid-April, the People's Bank of China announced that it would double the daily trading band to 1% on currency trades.

"From a longer-term perspective, this is good news as another indication that the Chinese are actively pursuing their new macroeconomic strategy of stimulating domestic demand," Barclays added. "It is too early to tell whether the recent band-widening signals a more rapid appreciation of the Chinese currency in the near term."

Investors may access the Chinese currency through exchange traded products:

  • WisdomTree Dreyfus Chinese Yuan Fund ETF (NYSEARCA:CYB)
  • Guggenheim CurrencyShares Chinese Renminbi Trust ETF (NYSEARCA:FXCH)
  • Market Vectors Chinese Renminbi/USD ETN (NYSEARCA:CNY)

WisdomTree Dreyfus Chinese Yuan Fund ETF

(Click to enlarge)

Max Chen contributed to this article.

Read the disclaimer; Tom Lydon is a board member of the funds for Guggenheim Investments.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.