I’ve been wanting to write about the Chinese Renminbi for some time but each week I ultimately figure what’s the point? With its pegged structure it’s as good as untradeable! All the same it is fascinating – the dollar value of FX intervention by the Chinese Government is mind blowing. Meanwhile the case you can build for appreciation (in an unpegged world) and likewise the case for depreciation of the Renmibi make for an FX strategists delight.

A story I heard the other day though really got me thinking about the profitable FX strategy that can be garnered from front running the obvious!!

It’s an odd enough story and has nothing to do with China but rather South Korea and Iran. You see recently South Korea decided to sell off its old fleet of Locomotives and who should put there hand up for them but the Iranians. Now for a little background – the USA doesn’t much like Iran and its nuclear program- (in case you haven’t heard) -to bring home the point the USA uses its power to impose sanctions on Iran and this includes limiting the Iran Rial’s FX market with the obvious negative effects that occur when a country can’t go about the business of commerce uninhabited. This even causes pain for the poor old South Koreans and their sold locomotives paid for in Rials, as now the South Koreans are stuck with a fist full on Rials when what they really want are some US Dollars.

So without even adding in a joke about buying Rail travel with Rial currency I’ll tell you what I’m getting at.

As George Soros demonstrated so clearly when he bet big against the Bank of England that they would have to let the GBP devalue there are times when technical/regulatory issues for a currency can create amazing opportunities and sometimes they can be “easy” to identify.

For example I’d say it’s easy to identify that the Renminbi will one day move to a free float. Of course when and how you trade it profitably is where your FX strategy comes in.

It’s not just the Renminbi though. What if sanctions against Iran were lifted, say because a more moderate leadership wins political power in Iran or some other emerging market in South America undertakes a technical change in its currency? I think emerging markets is definitely a space to focus on for these types of special opportunities.

It’s akin to buying a stock that you know is about to get included in the Dow Jones. You know that index and mutual funds the world over will have to own some of that companies stock and that will create a huge demand.

Happy hunting.

By Friday Fundamentalist, Published on 8th of July 2011
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