Tax & Financial Consulting Services
Five Currencies to Buy Before China Revalues it’s Currency
Karibu (Welcome) G&G Readers,
Have you ever noticed how a Big Mac and a Whopper cost about the same price? What about the prices at Target and Wal-Mart? They have pretty close prices too.
Simple: They’re competitors. They are going after the same consumers, so they can’t afford to make their prices too expensive or they’ll lose their best customers.
It’s the exact same way in Asia.
Most Asian countries export similar goods all over the world. However, if one country charges significantly higher prices than the others, then countries looking to buy those exports will take their business elsewhere.
Therefore, all Asian exporters have an incentive to keep their goods fairly competitively priced.
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Just as importantly, Asian countries can’t let their currencies get too expensive either. If my money buys more in Singapore than South Korea because Singapore has a cheaper currency, guess where I’m going to buy? Singapore of course!
This is why Asian countries work so hard to keep their currencies somewhat in line with each other. However, if one powerhouse Asian exporter strengthens its currency, then the others can easily follow suit and still keep their competitive advantage.
(It’s as if all the fast food restaurants changed their “dollar menu” to a “$5 menu” - they would still get customers because they would set a new standard for the restaurant industry.)
If you didn’t already know, this is already happening in China.
China just revalued their currency once again and let it float in a wider trading band than ever before. In April, Chinese Monetary Authorities allowed the yuan/dollar exchange rate to reach its highest valuation to date.
And it’s just a matter of time before the next revaluation happens.
A researcher and professor on the inside at China’s central bank, Wang Yong just predicted that China would likely allow an annual “modest revaluation” of 3% to 5% of the yuan in the coming years.
In other words, the Chinese yuan is likely to rise against the dollar a bit more every year. Talk about death by a thousand cuts.
So … then the question is what currencies should you buy before the Chinese revalue their currency?
Buy These 5 Currencies Before the Revaluation Happens!
The last time China significantly revalued their currency, it was hard to trade or invest in many emerging market currencies.
So instead, most currency investors focused on the third most traded currency in the world - the Japanese yen. As soon as China revalued, the Japanese yen gained overnight as well.
Japanese Yen Gained Over 300 pips (3%) in One Day the
Last Time China Revalued the Yuan!
This time around, I see five other Asian currencies shooting higher when the yuan appreciates, in the exact same way the yen appreciated a few years back.
But times have changed. It’s much easier for forex traders to buy Asian currencies like the South Korean won, Singapore dollar, Malaysian ringgit, Indonesian rupiah and Taiwan dollar, rather than sticking to just the Japanese yen.
In July of 2005 when the Chinese revalued the yuan, the South Korean won rose about five times as fast as the yuan in the 12 months that followed the revaluation.
Singapore’s dollar climbed three times as much as the yuan. The Indonesian rupiah gained five times as much, while the Malaysian ringgit rose two times as much.
So while most investors are talking about how to profit off the Chinese yuan reevaluation, everyone is looking at ways to buy the yuan.
But I’m recommending you buy the Asian currencies that give you more bang for your buck.
Why China’s Revaluation Could Come Sooner Rather than Later
In April, Singapore’s Monetary Authority (their version of a central bank) met and decided that they needed to act to prevent inflation from getting out of hand.
Now in Singapore, the central bank doesn’t raise interest rates to tame inflation. Instead, they adjust the currency higher. So at the meeting, they announced they would move the trading band higher. That’s central bank-speak for allowing their currency to appreciate.
Since these Asian exporters have to keep their currencies in check with each other, they all have their eyes on China. They’re watching and waiting for the leader to revalue the yuan, so they can follow with their currencies.
Even still, after China revalues their currency, economists estimate that it will appreciate about 3-5% in the following 12 months. At the same time, economists are expecting these other currencies to rise about 9%+ in the same amount of time.
So the moral of the story is to make money on the yuan NOT by betting on the yuan but by betting on these other Asian currencies that have responded well in the past to yuan revaluations.
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Metta (Wishing You the Best)
Asar Gary Gray
Tax & Financial Consultant, RFC
866-361-3872 toll free fax
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LEGAL NOTICE: This work is based on SEC filings, current events, interviews, corporate press releases and what I've learned as a financial consultant. Nothing herein should be considered personalized investment advice. It may contain errors and you shouldn't make any investment decision based solely on what you read here. It's your money and your responsibility.