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Dion's Weekly ETF Blog Wrap

How to Play the IMF's Yuan Review

Published 7/27/2010 8:14 a.m. EDT

The IMF announced the results of a review yesterday determining that China's currency, the yuan, is still undervalued. This reinforces the view I have held that investors can use WisdomTree Dreyfus Chinese Yuan (CYB) as a vehicle for slow but steady gains.

The peg that China had maintained with the dollar was loosened on June 19; since then the currency has appreciated against the dollar by 0.7%. According to the IMF's review, though, it still has further to go before it can be considered appropriately valued.

CYB increased by about 1.0% in the week following the peg readjustment, and then leveled off to where it still currently is at gains of about 0.5% since that time.

Investors should note that the gains in CYB will be slow, and investors should only play this fund if they have overall confidence in the progress of the Chinese economy in the long term. As China moves away from export-oriented growth and toward domestic, consumer-generated growth, having a currency that is appreciating against the dollar and against other currencies will become less potentially harmful. Such a shift could mean that the government will be less likely to keep such a strong hold over it.

Investors should not assume that the IMF's findings are capable of bullying the Chinese government into taking a more liberal stance on its currency, since trying to predict any government's actions is tricky business. China has also not been easily muscled on the topic of its currency in the past. Looking for a short-term bounce after this announcement in CYB could be an option, but since the fund is not a fast mover, it is best used with a more long-term mindset.

So, the findings can give instead investors confidence that there is still room for appreciation in the currency as China's economy develops and that CYB will be a good long-term play.

Finally, timing is important with this ETF in order to maximize gains on the slow-moving fund even in the long term. Therefore, if there is a blip upward after the IMF findings, investors should wait for it to cool off -- just as the fund cooled in the weeks after the initial euphoria following the June 19 readjustment -- and then look to gain exposure.

At the time of publication, Dion Money Management was long CYB.
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