Chart: Another reason that Chinese yuan has to fall24 May, 2012, 22:46. Posted by Zarathustra
Tags: Chinese Yuan, Renminbi
Last year, I have posted a chart showing that while Chinese Yuan appreciated modestly against the US dollar, Chinese Yuan has not appreciated at all against other most other currencies, largely thanks for US dollar weakness in the past many years.
That, in my view, has changed, as I am optimistic about the US dollar. And indeed, the dollar index is performing very nicely for the past year or so, while Euro falls (with gold, silver… you name it).
For Chinese Yuan, the very modest appreciation against the US dollar is not a big deal, because it has actually been depreciating against the Euro, which was the biggest trading partner of China (now a closed second with the US). And because of the US dollar weakness in the past many years, that actually means that Chinese yuan has not really appreciated against many other currencies.
But with the European economy now extremely weak and its currency getting weaker, what we see is that the Chinese Yuan appreciates against the Euro simply because the US dollar is performing well. And indeed, if the soft peg with the US dollar remains, the implication of a strong dollar for Chinese yuan is that Chinese yuan will virtually appreciate against almost every other currency. As mentioned last year:
China may be able to tolerate a gradual small appreciation against the US dollar, but if the US dollar starts to strength, as it seems to be now, and as a result of that making Chinese Yuan really strengthen against all major currencies, that would be much less tolerable from their export sector’s perspective.
The chart below shows Chinese yuan against the US dollar and Euro. As you can see, for the past ten years or so at least, despite the “appreciation”, Chinese yuan did not appreciate against Euro at all during all those times when it was appreciating against the US dollar. However, as you can see, that has changed in the recent years, particularly in times when the Euro crisis was intensifying such that the Euro falls against the US dollar.
If the economy weakens going forward (as I expect it certainly will), one of the last things China wants to see is to have its currency appreciating against both US dollar and the Euro. It would be best to have Chinese yuan depreciates against both currencies of China’s major trading partners.