JP Morgan - Asian FX Strategy: CNY Revaluation: Words, facts and actions

Summary

* The past few days have seen an intensification of CNY comments by Chinese policy officials that have leaned against significant CNY appreciation
* The simple facts suggest that these claims are overstated. FDI “hotmoney” inflows do not appear excessive, exports have regained their peak in February and speculative pressures from interest rate differentials are contained
* An examination of the policy statements leading up to the July 2005 revaluation shows that the comments can be misleading. Ironically, it was the US policy maker statements that proved prescient and reliable, though overt pressure on China to revalue was toned down
* Lessons from 2005 suggests that markets may be quick to take profit in CNY NDFs and that alternative proxies such as KRW proved better. However, we prefer to position through our long 12M MYR, SGD, TWD worst of call option due to better trade exposures and longer-run correlation performance

Introduction
Policy comments regarding CNY appreciation have intensified over the past week. This follows as a natural consequence of the National People’s Congress that took place last week and has resulted in various policy factions lobbying in their own interests. Ultimately, the decision to appreciate the CNY rests with the executive State Council and even as high up as the Politburo Standing Committee, where Premier Wen Jiabao has a seat on the nine member committee.

This note takes two approaches in evaluating the veracity of these policy claims. First, how do they stack up against the facts. Second, how reliable have previous CNY policy announcements been in the past. The short answers are that the facts are not so supportive of these claims and 2005 demonstrated that the statements may not be reliable, but their increased frequency is an indication that internal debate is taking place and actions are being considered.