Most of the emerging market currencies faced a difficult time since the start of taper, falling in the double digits. However, the Chinese yuan had managed to withstand the freefall so far, standing strong against the crisis in the emerging market currencies only until recently.
A slew of discouraging economic data from China has been blamed to be one of the factors for the weakening yuan. These data with rising debt worries have raised serious concerns about Chinese growth. Consequently, the economy is witnessing huge capital outflows.
Making things worse, a new announcement over the weekend by the People’s Bank of China is causing this heavily managed currency to weaken further. (read: China ETFs Slump on Terrible Export Numbers)
According to the announcement, the Chinese authorities have widened the trading band around the official reference rate it sets each day for the value of the yuan against the dollar.
The new band permits the yuan to fluctuate within 2% (in either direction) of the reference rate. The earlier band allowed the yuan to trade in a narrower band of 1%.
Following the doubling of yuan’s daily trading band, the yuan fell beyond the key level of 6.20 to the dollar on today’s trading session for the first time since April 2013. Moreover, the currency has fallen around 0.8% this week.
Experts believe that the widening of the currency band at a time when the yuan is already facing weakness is a targeted step to ease the country’s monetary condition. A loose monetary policy will offer some support to the sluggish Chinese economy.
Some believe that the weaker yuan goes well with the Chinese government’s strategy of boosting its currency’s international use. The recent move is believed to be a small step to develop its financial markets and open them to foreign investors.(read: China ETFs Tumble to Start 2014)
This move will allow the yuan to move in both directions as against a one-way strengthening against the dollar since so many years. The yuan has appreciated more than 30% since 2005. As such, investors should closely watch the below mentioned ETFs tracking the yuan relative to the dollar.
Chinese currency ETFs have been the second worst performing currency products this year after the Canadian dollar ETFs. These ETFs are already trading in the red since the start of the year and might continue with their downtrend if China continues to deliver less-than-expected economic data. Discouraging data is likely to lead to capital outflows causing further weakness in the yuan.
Market Vectors-Chinese Renminbi/USD ETN (NYSEARCA:CNY)
The fund is the second worst performing currency ETF since the start of the year. The fund has lost 2.56% so far in 2014. CNY manages an asset base of $181.2 million.
The fund tracks the S&P Chinese Renminbi Total Return Index seeking to track the performance of the Chinese renminbi (another word for yuan) versus the U.S. dollar. The Index represents an investment in rolling three-month non-deliverable currency forward contracts.