Daily Brief – Undervaluation

Undervaluation

At the start of Trump’s second term in the White House terms such as currency manipulation and over/under-valuation of a currency were widespread in financial commentary. This was because currency manipulators were expected to be (and in reality subsequently were) at the top of Trump’s hit-list. We’ll all recall the President standing in the Rose Garden of the White House with his ‘liberation day’ tariff card, the product of which was justified as an effort to level the playing field against currency manipulators.

Today that rhetoric has subsided as markets have been focussed upon other elements. However, there is an overwhelming belief that China’s Renminbi has become chronically undervalued. This undervaluation has been conservatively estimated at circa 20-25% versus fair value. It’s quite normal for the Renminbi to carry a discount versus fair value. However, it is the extent of the disparity this time that leaves the story deserving of particular attention. The value of CNY, and its offshore equivalent CNH as a result, are heavily influenced by daily fixing rates as well as other PBoC measures to control the value of the currency.

The argument for overvaluation stems from China’s increasing trade surplus, well in excess of $1B year-to-date as the nation switches towards manufacturing and technology exports to compete on the global stage. October saw the Renminbi’s spot price continue to make ground against the Dollar to combat this undervaluation. However, policy intervention from the PBoC, announced on November 3,has stunted progress on the normalisation of spot prices. As markets continue to speculate about how the President will act in the remainder of his term following embarrassment at the mid-term polls, China’s currency valuation may leave it in the White House’s sights once again.

Discussion and Analysis by Charles Porter

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