China dollar peg removed. What now?

O

Olav23

Recycles dryer sheets
Joined
Jul 4, 2005
Messages
423
Hi all,

I read that China (and Malaysia) have removed the dollar peg for its currency and will instead evaluate it against a basket of currencies. From the news stories, it sounds like it could really be a negative for the dollar.

Anyone have any opinions on how to either protect or profit from this situation? Should we all run out and buy China ETFs (or ADRs)? Should we hedge our dollars somehow? Should we exchange it for the Yuen now? :)

Opinions?
 
Olav23 said:
Anyone have any opinions on how to either protect or profit from this situation? Should we all run out and buy China ETFs (or ADRs)? Should we hedge our dollars somehow? Should we exchange it for the Yuen now? :)
Click to expand...

I think the dollar is very vulnerable. Since most of our investments are in 401K-type investments with limited options, I have 25% in Canadian investments (the 25% that are actually in Canada), and of the remaining 75%, half is in an EAFE (international index) fund and half in the US market in a basket of sector funds. We plan to retire in Canada, and the currency risk is a big concern. This is my way of dealing with it. Today, my US funds lost a bit (would have been more but gold mining fund came to the rescue!) but the international and the Canadian gained. Nevertheless, I lost a little ground if I look at the portfolio in Canadian dollars due to the exchange rate move, even though in US dollars it went up a bit.

Bosco
 
I've been thinking about that with today's news on the Yuan... We are China's biggest market. They are rolling in dollars from the extreme imbalance of trade with us. What can they do now, other than continuing to buy US debt with the dollars? If they try to make any extreme moves, won't they sink their own ship? They seem to like the Capitalist hand that feeds them... or is it their Communist hand that feeds us? URK!!
 
bosco said:
We plan to retire in Canada
Click to expand...

Ditto. If you play your cards right, that 401k becomes tax free..... or so I hear.
 
Marshac said:
Ditto. If you play your cards right, that 401k becomes tax free..... or so I hear.
Click to expand...

I wasn't aware of that. I thought that IRAs and 401Ks were treated the same in Canada as in the US (but Canada doesn't recognize Roths). The tax treaty provides that up to 20% (if you are taxed that high) goes to the US. Then you pay Canadian taxes, but get credit for the US tax you paid. All when you withdraw, of course.

Have you heard something else? If so, where can I find info?

Bosco :confused:
 
Telly said:
I've been thinking about that with today's news on the Yuan... We are China's biggest market. They are rolling in dollars from the extreme imbalance of trade with us. What can they do now, other than continuing to buy US debt with the dollars? If they try to make any extreme moves, won't they sink their own ship? They seem to like the Capitalist hand that feeds them... or is it their Communist hand that feeds us? URK!!
Click to expand...

Well, first, this isn't an extreme move. They are taking it pretty slowly. I've heard that this particular move might cause a 2% decline in the dollar.

Second, at the end of last year, they held about $260B of our debt. That's about 3% of their GDP. If it went to zero, they would feel it, but a drop of 10% or so wouldn't even register as a bee sting.
 
I would suggest that this will increase the value of hard assets, such as metals, oil and timber, as Chindia become the emerging "value added" manufacturers in the ongoing global trade war that has been gaining momentum since the Marshall Plan created a viable EU trade forum half a century ago. I am heavily invested in metal and mining stocks. I am not smart. If I had sought the advice of
any competent CFP about my holdings five years ago, he would have told me, in short, easy to understand words, that I was stupid.
I am at best a perfect analogy of a clock that is at least right twice a day, since I held these positions in one form or another for at least ten years. I worked in the mining and oil & gas sector so I invested in companies I thought I understood. For the bulk of the decades i have struggled to hold onto the 5-15% return. The last three years have made these stodgy holdings (XOM, PD, BHP) look like I had a plan. I am pleased with these commodity positions, but the reality is that paper money is currency, not wealth, and government fiat can and does render currencies worthless with historical regularity. This is part of the same driver for real estate, since its a form of hard asset investment.

I would suggest that the next big global investment will be mid-west black soil farmland. There will be plenty of hungry mouths to feed and money is worth little when the choice is hunger or 'currency".

...and do your own due dilligence.
 
The famous "Walmart effect" will take a beating and true inflation will come to the Western world. Did we really believe that just because some Chinese was willing to sell us cheap widgets that inflation was "low"? Most of us know better, and commodities/metals speak their clear language about inflation.

But China is smart enough to make this a VERY slow process - no need to kill the goose buying the "golden" eggs...

Investments in all of Asia and commodities/metals seems to have been re-confirmed in my view. Cheers!
 
In Thailand, the $ dropped about .75 Baht; from approximately B42 to B41.25 per USD.

The adjustment was relatively small, but a stronger Chinese RMB (Yuan) will help a bit in offsetting the price of imported oil. (Oil is still priced in USD.) Thailand and other SE Asian nations seem to welcome the stronger RMB, even though their curriencies are strengening as well.

From what I can gather, the Chinese have approximately $1 trillion stashed in US Treasuries, so every time they allow the RMB to appreciate, they also give themselves a "haircut" so to speak. In anycase, I don't look for the RMB to surge in value. More like a slow and steady rise. Time will tell.

Interesting article by Paul Krugman:

http://www.nytimes.com/2005/07/22/opinion/22krugman.html?th&emc=th

But all is not lost, I can still treat my girlfriend to supper for $2 USD. :D
 
I think that the most likely immediate effect is commodity price increases as China becomes decoupled with the USD. Over the longer term, there may be significant offsetting factors. Will the revaluation to the Yuan over time sap China's growth? Will the stimulation of US exports by virtue of less distortion in the currency markets help shrink the US trade gap? Both of these things might reduce commodity nflation effects in USD. I don't know what the net effect will be. Either way, I like my hedges in the form of PRCDX, GIM and EFA (totalling ~25% of my portfolio).

I suspect Walmart is boned, although they might escape disaster by moving production to other areas of the world (India, some parts of Africa, etc.).
 
I think that the most likely immediate effect is commodity price increases as China becomes decoupled with the USD.
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For sure and a small decline in dollar so it intl' attractive since currency movements (assuming investment is unhedged) are one part of your return/loss.

Going out a ways I think it is a step in the right direction for China and US. It had to be done just a matter of when.
 
So, the meaning I have gotten from this thread, to summarize is:

Buy commodities as a hedge, move a bigger percent of investments to Intl/Emerging markets (though I am not sure if these are currency hedged if you go ETF) or move to Canada. :) All of these are doable, except the Canada one at the moment :)

Does anyone know if it is possible to store money in US banks in a different currency? Say for instance I really felt strongly about the dollar heading downwards over a long term period. Could I say to my bank, please convert it to Euros at the current exchange rate, and keep it in Euros?
 
Yes, you can.  Damn someone help me with the bank that allows you to deposit money linked to other currencies.  Online bank and I got the name from a Forbes article several months back.

Is Wab good or what?
 
Concerning Everbank - you will pay a 3/4% (over spot) fee for conversion into the foreign currency, and a 3/4% fee for a conversion out of the foreign currency back into dollars.   They also offer CD's in foreign currency some of which pay interest (~1 to 2%) but again the conversion fees apply.  The CD's can be rolled without conversion.   
 
Has anyone looked at what is happening with the yen? It seems the dollar has been strengthening against the yen from 104 in May to 111 now. This seems strange. Last thing I heard was that Japan was buying lots of dollars try stop pressure for a stronger yen.
 
Seems a bit exorbitant, but I guess I could consider it a .75% expense ratio! ;)
 
Olav; no ETFs (that I know of) does currency hedging so you will get that currency diversification with any foreign ETF. Cheers!
 
Must be another way than everbank... futures markets? Probably too expensive for the individual investor, if have to keep rolling over the futures.
I'd want to be prepared to hold the position for years, and wouldn't want to give up interest for that time. A China short term bond fund would be nice. :)

OECD's PPP data omits China: http://www.oecd.org/dataoecd/48/18/18598721.pdf
Anyone have link to Yuan's PPP? Better yet, that graph of PPP vs. PerCapitaGDP? Can't find it, maybe no longer available. :(
 
lazyday--

I've owned this cef in the past: FAX It's a SE Asia bond fund w/leverage. To my understanding, the countries near China prefer to keep their currencies pegged to the yuan. Here's another site to poke around in, lots of interesting int'l bond funds.

http://www.etfconnect.com/default.asp?etfcs=noshow

--Greg
 
Greg, thanks for the idea, though your link shows about half the fund is in Australia, and expense ratio of 1.19%.
 
lazyday said:
Greg, thanks for the idea, though your link shows about half the fund is in Australia, and expense ratio of 1.19%.
Click to expand...

lazyday--the etfconnect site allows you to do a variety of searches for funds, by country, by type (bonds or equities), etfs, etc. Plug in a some different sets of criteria and see if you find something that approaches what you want. The fees are almost always high of cefs. Good Luck.

--Greg
 
GIM is more resonable at 0.7% e/r and no currency hedging. Both developed and emerging.
TEI is resonably priced considered it is in the harder to get to emerging debt.
I currently hold some GIM as well as PFUIX and PEBIX. Have held TEI before.
Cheers!
 
Ben's PEBIX looks interesting if I were to start buying EM debt.

Right now, I'm not too interested in bonds, except I might consider a currency play specifically on the Yuan if something were available without much risk other than currency risk. I don't think there is tho.

If the economists are right about the Yuan being 40% undervalued, it could make an interesting holding, for someone willing to sit on it for some years. Maybe you'd be pleasantly surprised with a quick profit, or maybe 20% over 2-3 years, or not, but seems like could be good risk for someone patient.
 
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