27 October 2016
A shift in currency trends necessitates an adjustment in investment strategies. Photo: CNSA
A shift in currency trends necessitates an adjustment in investment strategies. Photo: CNSA

How to invest amid stronger dollar, weaker yuan

With the US dollar trending higher and China’s yuan shifting to a two-way movement, how should people adjust their investment strategy?

The greenback has continued to strengthen against other currencies on the back of US economic recovery. By contrast, the euro and the Japanese yen have weakened more than 10 percent last year amid their central banks’ monetary easing moves.

The greenback is expected to rally further as a Fed rate hike is around the corner. The US dollar index is expected to shoot to 97.1 in late 2015 and to 98.9 at end of 2016, as opposed to 90.2 in late 2014, according to Bloomberg data.

However, the index has shown a fluctuation of around 10 percent since the start of the year due to a mix of global economic data, central banks moves and geopolitical developments.

Take the euro, for example. It has tumbled to 1.05 against the dollar in March when the ECB announced monetary easing. But it picked up to 1.15 in May bolstered by positive economic figures, a rise of 9.1 percent. However, the unit weakened again to 1.06 on November 17 amid expectation that the ECB may expand its debt purchasing program.

Meanwhile, the offshore renminbi has seen greater volatility after the daily-fixing reform in August. The offshore renminbi has weakened to the range of 6.3 to 6.5 against the dollar recently, compared with 6.2 before August.

Many currency investors are facing the dilemma of record-low interest rate and weakening exchange rate of various foreign currencies. It seems quite difficult to obtain returns.

If they want to keep investing in foreign currency, they could take a bet on structured deposits. For example, they can gain higher potential return via link with a specific currency exchange rate.

Also, there are more choices of foreign currency products like bonds or funds, which would pay interest or dividend at certain time.

The market’s focus is also on the Chinese yuan, which has ended a long-time one-way appreciation since the reform in August. The redback has lost 2.7 percent against the dollar this year. However, it’s still relatively strong compared with other major currencies, which have posted depreciation of 10 to 15 percent during the same period.

The expected inclusion of the yuan in the IMF’s SDR basket will boost demand for the Chinese unit in the long run. The yuan already became the world’s fifth biggest payment currency in September, accounting for 2.45 percent of all world payments, compared with 1.39 percent in January, according to SWIFT data.

The rapid development of renminbi products also offers new options. The market now provides various yuan-denominated funds, bonds and derivatives.

The Shanghai-Hong Kong Stock Connect and the upcoming trading link with the Shenzhen bourse will also allow Hong Kong investors to gain greater access to China’s A-shares using the renminbi.

This article appeared in the Hong Kong Economic Journal on Nov. 20.

Translation by Julie Zhu

[Chinese version中文版]

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Head of wealth development for Hong Kong, HSBC

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