Potential Chinese Announcement on June 19th Might Shakeup Forex Markets

Look for China to make a Yuan announcement on June 19th. The 19th is the one-year anniversary of the decision by the People's Bank of China to allow the currency to appreciate. According to Bloomberg, TD Securities believes that, while the Chinese may claim to be increasing the trading band on the yuan, the decision (if it comes) will do little to affect the actual market value. Why? The last time the Chinese increased the trading band on the yuan from 0.3 percent to 0.5 percent, the currency appreciated slightly. However, the PBC then stepped in and drove the value of the yuan lower by selling yuan for foreign reserves. China has a vested interested in keeping the value of the yuan low, as the Chinese economy is export-led. A cheaper yuan boosts Chinese exports, as Chinese goods appear cheaper to foreign consumers. If the yuan appreciates significantly, the Chinese manufacturers may lose this advantage. It may be good for Chinese wage earners and consumers, as their paychecks would instantly go further, but it might trigger a recession in the Chinese economy, as it is orientated around producing goods for foreign markets. Additionally, an appreciation in the Chinese yuan might lead to a devaluation in China's massive foreign reserves, an event which the PBC might want to avoid at all costs. So, why would the Chinese increase the band without letting the currency appreciate? They may be looking to make a political statement. The U.S. has increasingly pressured China to become more fair in its trade practices, and allowing the yuan to appear to appreciate would reflect a willingness on the part of the Chinese. At the same time, inflation has been ravaging the Chinese economy. Signalling a willingness to allow the yuan to appreciate may work to diminish Chinese inflation expectations. Either way, the forex markets might be shaky on Monday. Action Items Bullish: Traders who believe that the Chinese will announce a band widening on Monday and the yuan will appreciate, might want to consider the following trades:

• Buy Wisdom Tree Dreyfus Chinese Yuan Fund CYB in a long play on the Chinese yuan. If the band widens and the yuan appreciates, CYB may do well.
• Buy Power Shares DB US Dollar Bearish Index UDN in a short play on the dollar. If the yuan appreciates, the U.S. dollar may depreciate, making UDN potentially a profitable play.

Bearish: Traders who believe that no announcement is likely, or the markets will see the announcement as a farce, may consider taking positions in the following:

• Ultra Short FTSE China 25 FXP is a short China play. If China is announcing a band widening, but does not intend to follow through, it may foreshadow weakness in the Chinese economy.
• Currency Shares Swiss Franc Trust FXF is a long franc play. The franc is a traditionally strong currency that may appreciate on weakness in the yuan.

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