The 2013 playbook is unlikely to be replayed in 2021. We believe that investors with RMB exposure should stay the course. These prospects revive bad memories of the mid-2013 taper tantrum, in which US real interest rates rose sharply and triggered a strong dollar rally. Some investors are concerned that, as the US economic recovery continues and the Fed tapers its bond purchases, the carry trade could come under pressure. Not only has this resulted in a higher relative return due to carry, but it provides a buffer in case the RMB suffers any modest depreciation in the short term. The RMB offers a yield advantage of 2.25% to 2.75% relative to the euro, pound and US dollar. When adjusted for carry, or the yield investors earn when buying these currencies, the difference between the RMB and the other currencies is more pronounced ( Display). As the Display shows, however, the euro and pound have been more volatile than the RMB over the past decade, resulting in the RMB providing a better risk-adjusted outcome. The currency has moved broadly in line with the euro and British pound, for example, partly reflecting that they share the same US-dollar denominator. In this respect, the RMB has benefited from both its relative stability and attractive yield. One of the factors underpinning the RMB’s strength has been the attractiveness of its carry trade-that is, borrowing in a lower-yielding currency to invest in the RMB. The People’s Bank of China (PBOC) has also taken steps to moderate the RMB’s recent rise.ĭespite these developments, we believe that the RMB could be poised to make further gains in the short term. Increasing talk about the Federal Reserve tapering its bond buying program has raised the prospect of higher US interest rates, which could make the dollar more attractive relative to the RMB. The recent rally took the RMB to its strongest level in three years against the US dollar and many other currencies. In our view, however, the risks are balanced in favor of further appreciation. Many investors with exposure to the Chinese renminbi (RMB), having enjoyed a strong rally in the second quarter, are worried that policy uncertainties could hurt the currency’s short-term outlook.
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