Jim Rogers Buying the Yuan

[john kane]

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How do we explain that and how do we react to it?

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basically a guess...but...when the book was written, maybe rise in commodity prices (for whatever reason such as decrease in supply) had a serious effect on costs of business -> decrease profits. whereas instead the cause of the rise in commodity prices is becuase global markets (spec india and china) are booming, which in turn helps the US businesses, and this overrides the extra cost they pay for commodities.

probs completely wrong, but felt i might as well give it a shot.

[tippy]

I can give you my theory. Not sure if I'm correct, but this is how I see it. Once you go through the book you will find that each of the markets don't move exactly in sync. There are lags. Sometimes the effects from the other markets don't show up immediately.

Go back and look at the stock market in late summer. It should have rolled over. The ONLY thing that saved the market was that 50 point cut by the Fed. Even given the 50 point cut, the market barely even made a new high. If the FED had stood pat, we wouldn't be anywhere near 14000. We also wouldn't be anywhere near 1.44 in the EURO and likely gold wouldn't be anywhere near $800. Look at each of those markets from the day of the cut on August 17.

Secondly, the effect of the weak dollar isn't felt in the stock market until commodities reach the point where inflation becomes a factor. As of present, inflation isn't a foremost concern of the FED or the stock market. You are in that dead lag time when one of your markets (stocks) is out of whack. I personally think the stock market is the market that is out of whack and is due for a fall. I could be wrong. Once a weak dollar gets to the point where it pushes commmodities to a point where inflation becomes a concern, then the FED has to think about raising rates and that will be the final bullet that kills the stock market.

So far we have been lucky and the weak dollar hasn't pushed commodities to the point where inflation has become dangerous, like we had in the 70's-80's. I think it is coming though. Gold is a leading indicator of inflation and it is pressing $800. It shouldn't be long until the rest of the commodities catch up. Most of the commodity stocks are up today, which suggests that commodities will continue to rise. Also, with oil at $90 we will see gas go up soon. For whatever reason inflation hasn't shown up at gas pump prices given the huge run up in oil prices. Lag time.

Also take a look at what is happing overseas. I believe just this morning Germany showed a CPI higher than expected. Inlation is more of a concern overseas, but it should reach us soon.

Of course I could be wrong. By the way I added another bullet to my dollar position at 1.4420, so I hope I'm not wrong, LOL. Average position now at 1.4401.

[PairTheBoard]

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If the market knew for a fact that China was going to unpeg the Yuan in say 11 months but keep it pegged right now you can bet your house that so much money would flow into Yuan futures that all the arbitrage in the world would not hold the price down. People would still certainly borrow dollars to buy Yuan right now. But they wouldn't waste their Yuan on little premiums selling USD/CNY futures contracts barely above current spot prices. They would just hold the Yuan for 11 months.

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whats funny here is that i re-read my posts and one of the conditions for the spot-futures relationship wasn't mentioned. namely, the spot price has to be free to move.

in the example you gave, china could keep their currency pegged for those 11 months (albeit with increasingly large costs since everybody would be clamoring for yuan) and the futures price would increase significantly b/c the spot price cannot move despite all the buying.

you are also correct that PBOC is providing the free money here (which goes back to why i think currency markets present some of the biggest opportunities and can be very inefficient) since they are basically the only ones willing to sell yuan.

in all smoothly traded futures markets though (where both sides are free to move and you can long/short both spot and futures), the prices are tied together via arbitrage.

Barron

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Right. China's artificial peg, paying too many Yuan for dollars on the spot market, creates an artificial spread between the spot and futures market that would normally be arbed away in a free spot market. The market knows China can't keep doing that forever. Sometime in the future the Yuan must adjust up.

One thing to keep in mind is that the higher inflation gets in China the less attractive these Yuan plays become. If China inflation stayed high enough, long enough, the underlying - and unknown due to lack of a free spot market - value of the Yuan would be slowly declining in the background against the dollar. In that case China could concievably continue its peg indefinitely until the real value of the Yuan actually came into line with the peg. All those people who borrowed dollars to buy and hold Yuan would lose the interest rate differential over the time of their play. And all those who bought Yuan futures at premiums would lose the premiums they paid, including that part of the premium based on the interest rate differential.

Be careful. China may have a better idea what it's doing than we think. At the end of the day China controls the spigots to the Yuan.


PairTheBoard

[DcifrThs]

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If China inflation stayed high enough, long enough, the underlying - and unknown due to lack of a free spot market - value of the Yuan would be slowly declining in the background against the dollar

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i have to disagree here. i think i know what your'e trying to say...but if i get it wrong, correct me.

high inflation with high growth in china is exactly the conditions that would cause further revaluations of the yuan (china doesn't want run-away inflation and have shown a desire to raise their deposit rate to 3.6% in teh past few months). if inflation stays high enough, long enough, the pressure to revalue in order to be able to execute monetary policy decisions i think will be the main driver and thus high inflation will lead to higher CNY/USD rather than lower as you stated (i think() above.

Barron

[PairTheBoard]

[ QUOTE ]
[ QUOTE ]
If China inflation stayed high enough, long enough, the underlying - and unknown due to lack of a free spot market - value of the Yuan would be slowly declining in the background against the dollar

[/ QUOTE ]

i have to disagree here. i think i know what your'e trying to say...but if i get it wrong, correct me.

high inflation with high growth in china is exactly the conditions that would cause further revaluations of the yuan (china doesn't want run-away inflation and have shown a desire to raise their deposit rate to 3.6% in teh past few months). if inflation stays high enough, long enough, the pressure to revalue in order to be able to execute monetary policy decisions i think will be the main driver and thus high inflation will lead to higher CNY/USD rather than lower as you stated (i think() above.

Barron

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I think it's the Interest-Inflation rates differential that's the key. Even with strong growth, if that differential gets large negative the currency will weaken. What is China's policy on this? How will they prioritize Growth vs Yuan? Right now that differential is positive in the U.S. and negative in China. By all rights, based on this factor, the background value of the Yuan vs. Dollar should be weakening as we speak. If it were we wouldn't see it in spot prices because China has the Yuan pegged below its real value against the dollar. China's policy might be to prioritize growth and allow a background devaluation of the Yuan, at least as long as it stays above the peg.

On the other hand, there's the Balance of Trade factor.

PairTheBoard

[galmost]

Say I've found a way to buy renminbi in hard cash, wtf am i suppose to do with it? Should I just bury it somewhere and wait a few years for it to go up in value or something?