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Chinese RMB Appreciation Always Seems Six Months Away (But It’s Coming)…

March 9th, 2010 Michael McDonough

Since the start of this year I have been a proponent of the belief that China will once again begin to gradually appreciate their currency as exports recover, and inflation begins to creep back into the Chinese economy.  As the chart below illustrates,  investors in the CNY NDF market appear to share this view.  But, excluding the curve from 3/10/09, significant RMB appreciation always seems to be six months away.  The magnitude of the appreciation has grown from September, but is still six months off.  In addition to inflationary fears, speculative capital inflows have buffeted China due to interest rate differentials and the expectations of eventual RMB appreciation, placing further pressure on the currency.  What I believe this data shows is that appreciation in China is inevitable, while the actual timing and magnitude remain in question.  But, I do expect we will see the Chinese government reinitialize the RMB’s gradual appreciation within the next six months.  This move will be expedited if export growth remains robust, while inflation continues to rise.

RMB NDF Curves

Source: Bloomberg

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