Wells Fargo & Co., the top forecaster for China’s yuan, said investors should buy one-year non-deliverable forwards on the currency as its rally outpaces what the contracts have already priced.
The yuan will probably appreciate to 6.5 against the dollar in 12 months from 6.78 today, outpacing the advance to 6.6775 priced into forwards of similar maturity, according to Wells Fargo predictions. The contracts, settled in dollars, allow traders to bet on the currency’s direction without access to it.
“There’s a buying opportunity in the NDFs,” said Nick Bennenbroek, global head of currency strategy at Wells Fargo in New York. “Once the appreciation starts to pick up more speed, that’s when the expectations for gains are going to be built into the NDFs.”
Bennenbroek, 39, joined Wells Fargo in 2007 to build the bank’s currency research department and was the most accurate forecaster for the yuan in Bloomberg data covering as many as 48 firms. The San Francisco-based lender placed third in overall currency forecasting for the six quarters ended June 30. TD Securities Inc. in Toronto and Standard Chartered Plc in London ranked first and second.
The People’s Bank of China said on June 19 it would allow the yuan, also known as the renminbi, to trade more flexibly in a 0.5 percent daily trading range after holding it at a 6.83 peg against the dollar for two years.
“The key to the renminbi was to monitor the economic and financial backdrop to identify trends that would support the decision to adjust the peg,” Bennenbroek said in a July 2 interview. “Half the equation was getting the economic and financial conditions in place to support a change in currency policy. We then were looking for events that would provide a natural window for a change in China’s currency policy.”
U.S. Treasury Secretary Timothy F. Geithner said on April 3 he would delay a report due two weeks later on exchange-rate policies, opening a “window” for China to change its currency policy. Members of Congress had demanded Geithner use the report to label China a currency manipulator.