FOREX

Traders and investors looking for exposure to non-dollar-denominated assets may choose from two of the more liquid currency ETFs set to benefit from growth of the Chinese yuan.

Monday’s plunge in global equity prices briefly boosted the dollar, giving some hope that it was finally bottoming. The optimism didn’t last long, however, as the dollar gave up most of its gains on Tuesday.

The negative technical outlook for the dollar is in agreement with the bearish fundamentals, and S&P’s recent downgrade of its US debt outlook is likely to add further downward pressure over the next few months.

The downgrade of US debt may have accelerated plans by the Chinese government to make the yuan more of a global currency. A Tuesday Wall Street Journal interview with a Hong Kong monetary official hinted that discussions were underway to make it easier to bring yuan funds raised overseas back into China.

This would open up the Hong Kong debt markets to many companies and they would be able to invest in China without converting to dollars. Under current guidelines, large transfers of all currencies coming into China must be approved by the government.

Recent data suggests that the yuan is already becoming more global, as 7% of the foreign trade in the first quarter was in yuan, which was a sharp increase from just 0.5% last year. Of course, currency traders go where the yield is highest, and Chinese tightening over the past six months also makes the yuan more attractive. Nevertheless, do not expect the yuan’s value to be determined by the free markets for some time.

Also attractive from both a growth and yield standpoint is the Australian dollar, as its major uptrend is still strong despite the impressive gains of the past two years.

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Chart Analysis: The most liquid way for US investors to participate in a higher yuan is through the WisdomTree Dreyfus Chinese Yuan Fund (CYB), which seeks to “achieve total returns reflective of both money market rates in China available to foreign investors and changes in value of the Chinese yuan relative to the US dollar.”

  • Prior to today’s headlines, I had noticed that CYB had broken out of its trading range (lines a and b) on high volume several weeks ago. CYB then consolidated its gains for a week before turning higher on Tuesday

  • There is next resistance on the daily chart at $25.68-$25.81 with highs from 2009 at $26.50 when trading was very thin

  • Initial support is now at $25.35-$25.45 with more important support at $25.10-$25.20

  • The daily OBV pattern is positive, as it has held good support, line c, and turned up on Tuesday

NEXT: Strong Yuan to Boost Australian Dollar: How to Play it

Tickers Mentioned: CYB, FXA