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What the Yuan Can Tell Currency Investors

Tuesday, 5 Mar 2013 | 2:31 PM ET
Chinese Yuan
Will Crocker | Getty Images
Chinese Yuan

If you're looking for clues to the likely direction of emerging market Asian currencies, the strategists at Wells Fargo have a suggestion for you: think China.

"Due to strong trading ties, Chinese developments can have a significant influence on Asian emerging currencies," said Nick Bennenbroek, head of currency strategy.

That makes sense, since China accounts for so much trade with other Asian and antipodean countries. For starters, it is Australia's main trading partner, and Bennenbroek said it accounts for some 27 percent of Taiwan's exports.

But is the yuan the best indicator to watch?

Bennenbroek has looked back over time, and compared whether moves by the Japanese yen or the Chinese yuan are more closely correlated to moves in other Asian currencies. The results, he said, are clear.

The yuan's moves are roughly 60 percent correlated with moves in six Asian currencies: the Thai baht, Taiwan dollar, Singapore dollar, Philippine peso, Malaysian ringgit, and Korean won.

"In contrast, those six Asian currencies have often moved in an opposite direction to the yen," Bennenbroek said.

The correlation with the Australian and New Zealand dollars has been weaker, he added, but the yuan still moves more in tandem with those currencies than does the yen.

Wells Fargo expects the Chinese economic recovery to continue and the currency to strengthen, which Bennenbroek said is "consistent with our forecast of appreciation for most Asian currencies in 2013." For investors with a risk tolerance strong enough for these thinly traded currencies, Bennenbroek especially likes the Philippine peso, the Korean won, and the Malaysian ringgit, and expects them to appreciate 4 to 5 percent this year.

Just keep an eye on China.

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