{"id":10562,"date":"2010-06-25T11:29:53","date_gmt":"2010-06-25T15:29:53","guid":{"rendered":"http:\/\/countingpips.com\/fx\/?p=10562"},"modified":"2010-06-25T11:29:53","modified_gmt":"2010-06-25T15:29:53","slug":"chinas-historic-de-pegging-is-much-ado-about-nothing","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2010\/06\/25\/chinas-historic-de-pegging-is-much-ado-about-nothing\/","title":{"rendered":"China\u2019s Historic De-Pegging Is Much Ado About Nothing"},"content":{"rendered":"

China\u2019s Historic De-Pegging Is Much Ado About Nothing <\/a><\/p>\n

By Justice Litle, Editorial Director, Taipan Publishing Group<\/span><\/p>\n

China’s de-pegging announcement got the currency bulls all hot and bothered this week. The excitement was most definitely premature.<\/em><\/strong><\/p>\n

This past weekend, an announcement of great importance came forth from China. To kick off a “new era,” we were told, the Chinese yuan would be de-pegged from the U.S. dollar.<\/p>\n

Excitable types on the long side of the market thought this a very big deal. Stocks gapped open higher to start the week, with emerging market equities faring particularly well. But it wasn’t long before currency markets sagged as reality came to light: The West had been juked once again.<\/p>\n

To be “juked” \u2013 or, more fully, “juked out of one’s shoes” \u2013 is an American football term. Roughly, it means to be faked out, played for a sucker, or otherwise made a fool of, by a sufficiently fleet-footed opponent.<\/p>\n

The art of the juke requires natural dexterity and the ability to game a defender’s intentions. The would-be juker will typically “feint” or “dance” in one direction, push hard off a planted foot, and then quickly pivot the other way. If done correctly, the defender may even fall down in a heap<\/a> upon lunging into empty space.<\/p>\n

That is more or less what happened to the China currency bulls this week. All kinds of good things were supposed to happen with the revaluation of China’s currency. And those good things may indeed happen \u2013 some far off day well down the road. Trouble being, we have zero idea when.<\/p>\n

\"Chart:
\nView Larger Chart<\/a><\/p>\n

The implied promise of the de-pegging is that China’s currency will be allowed to rise (in comparison to the $USD). Less trumpeted is the fact that the yuan can actually fall<\/em> now as well.<\/p>\n

While the PBOC (People’s Bank of China) may give the yuan a bit more elbow room, they are quite likely to stick to the super-tight range they have maintained for some time now. How tight is super-tight, you ask? Here is one way to look at it: Over the past two years, the WisdomTree Yuan ETF<\/strong> (CYB:NYSE<\/a>)<\/strong>, has traded in roughly a one-dollar range… a max fluctuation of four percent<\/em> on the $24-and-change buy price.<\/p>\n

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The timing of the de-pegging announcement was laughably political. Given the upcoming G-20 meeting in Canada<\/a>, the dragon’s primary goal was to deflect protectionist heat.<\/p>\n

“Don’t look at us! We’ve listened to your requests \u2013 see? We let the yuan rise in value by a whopping 0.4%! (Never mind that it fell back the very next day…)”<\/em><\/p>\n

If you listen hard, you can almost hear the snickers from Beijing. As hopers grasp at straws, the mandarins laugh up their sleeves…<\/p>\n

(By the way, you should read what my fellow Editor Adam Lass thinks about China. Sign up here for his investment commentary<\/a>.)<\/em><\/p>\n

Why China Will Stay Its Hand<\/strong><\/h3>\n

There are multiple reasons why the dragon cannot afford a meaningful strengthening of the yuan in the near term, much as the U.S. and Europe might wish it so. Here are a few:<\/p>\n