When Will the Yuan Slow Down?

When Will the Yuan Slow Down?
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The Chinese yuan has been on a tear, but these strategists don't see it lasting.

There has been plenty of talk on the campaign trail about China keeping its currency artificially low, but that sure hasn't been the case lately. The yuan has been marching upward, regularly hitting new highs against the dollar.

Just don't expect the trend to last, say the currency strategists at Wells Fargo .

"While the outlook for the Chinese economy has improved, we suspect that the speed of the recent advance is somewhat artificial and transitory," they wrote in a note to clients. Before the end of November, the yuan's appreciation "will slow to a cruising speed that is more reflective of China's underlying economic outlook," they add.

Why the shift? It's the politics, stupid.

"The proximity of the 6 November Presidential elections has probably encouraged Chinese authorities to allow for faster currency appreciation at the margin," the strategists say. Also, the regular Treasury report on foreign exchange practices has been delayed until early November, and that could be encouraging the Chinese to allow the yuan to rise.

Things will shift after the U.S. election - and the coming political transition in China around the same time, the strategists say. "In the interests of stability during this transitional phase, we doubt Chinese authorities will want to pursue ongoing rapid appreciation," they say.

The Wells Fargo strategists expect just one percent appreciation in the yuan over the next twelve months.

Stay tuned.

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