China: The RMB Flunks The Safe Haven Test
On 1st October, the RMB will become the mushiest member of the SDR: it is NOT a safe haven currency, and it will keep depreciating steadily.
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LAST WEEK
Around 24th July, the Dallas Fed released an interesting bit of research, "Is the RMB a Safe Haven?" -
GOAL
According to Bloomberg's Elena Popina of 25th July, "The report tested the relationship between a gauge of stock market price swings and the value o the yuan against the US dollar, yen, Euro, Pound and the Swiss Franc, currencies perceived as safe exchange rates because their value rises relative to others during uncertainty." -
UNCERTAINTY"
This arises when the Chicago Board Options Exchange Volatility Index, or VIX, spikes. -
THREE CONCLUSIONS
The report finds that; a) the RMB has NOT been a safe haven currency during stormy times, i.e. when the VIX spikes, the RMB has FALLEN against the other safe haven currencies ; b) its currency regime is a "dirty float (when the dual exchange rates were unified on 1st January 1985, the RMB stood at 2.8/$; now it costs 237% more, 6.66/$) , and c) the RMB accounts for a tiny 1.7% of global payments. -
SDR MEMBERSHIP
Nevertheless, as announced on 13th Nov 2015, the RMB joins the IMF's Special Drawing Rights (SDR) basket on 1st October 2016. -
INVESTMENT IMPLICATION
Do NOT buy the RMB if you are banking on it appreciating or being a safe haven currency. Saddled with the burden of having to create 10 million jobs a year, Beijing will want to keep the RMB weak-ish in order to promote the nation's price-sensitive exports.