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Chart of the Day: only two currencies worth holding
Forget the pound, euro, swiss franc... look to the redback and greenback.
by Chris Marshall on Nov 08, 2011 at 12:18
Citywire columnist David Kempton tells us this morning that he is investing in the renminbi, the heavily controlled Chinese currency:
‘There are only two currencies where I would hold much cash. The dollar, inevitably, even though the economy is awful, as it remains ‘the sanctuary’, and the Chinese renminbi, which has been undervalued for years, but at last looks close to a revaluation as part of our demise.’
Kempton, a highly experienced private investor, is investing in the redback via the new Allianz Renminbi Currency Fund (which invests in Hong Kong deposit accounts in the Chinese currency).
The chart above gives you an idea of how the renminbi has appreciated. Specifically it shows the renminbi/US dollar rate in grey and the real effective exchange rate (REER), a trade-weighted average of the RMB against all of China’s major trading partners’ currencies, in red.
Since 2005, the renminbi exchange rate has been allowed to float in a narrow margin, after its peg to the US dollar was lifted. But amid accusations of currency manipulation, the Chinese authorities have been under pressure – particularly from US politicians – to keep on strengthening the currency (which is also known as the yuan).
This pressure is likely to remain elevated while the global economy remains weak (though the Financial Times today cited a government researcher proposing China allows the renminbi to fall when other emerging market currencies are weakening – such as is currently happening).
China is gradually internationalising its currency, with full convertibility into other currencies part of this plan – currently the renminbi can only freely flow out of China for trade-related activities. Most global investors predict that the renminbi will be convertible by 2016, a Bloomberg poll earlier this year showed.
The next step, though not thought likely for a long time, is for the renminbi to surpass the US dollar as the international currency.