China Sees More Currency Volatility as Central Bank Seeks to Discourage Idea That Yuan is a “One-Way Trade,” Says Market Vectors’ Rodilosso

Faced with the task of cooling off its credit markets and discouraging excessive foreign currency flows, China has recently demonstrated a willingness to let the value of its currency decline, contrary to the long-held belief that buying the renminbi was effectively a “one-way trade,” according to Fran Rodilosso, fixed income portfolio manager for Market Vectors ETFs.

“The perception in the market has been that the renminbi could only appreciate in value,“ said Rodilosso. “It looks now as if the Chinese have set out to dispel that belief with the People’s Bank of China likely to allow the currency to trade in a wider band, with more latitude to move to the downside.”

Rodilosso pointed out that China is now fighting many battles at once, trying to control the deceleration of growth while also discouraging hot money flows1 and excessive credit creation2. He noted that investors in renminbi-denominated equities and debt are indeed used to a steady appreciation, with the currency one of very few to appreciate versus the U.S. dollar in 2013. The prospect of greater currency volatility is something that investors will likely start to consider, and ultimately may lead them to demand more compensation, in the form of yield, Rodilosso said.

A cheaper currency is a mixed blessing for investors, according to the Market Vectors portfolio manager. “A weaker currency does have the effect of making it cheaper to repay debt denominated in that currency, potentially a small credit positive for some issuers,” he says. “On the other hand, holders of the dollar debt of Chinese issuers, particularly those domestically-oriented companies without significant dollar revenues, might have greater reason to be concerned from a credit perspective.”

As China continues to seek what it believes is the appropriate level for its currency, investors would be well advised to keep a close eye on the actions of the Chinese Central Bank, Rodilosso concluded.

Mr. Rodilosso has over 20 years of experience trading and managing risk in fixed income investment strategies, including more than 17 years covering emerging markets. Market Vectors ETFs under his watch are Renminbi Bond ETF (NYSE Arca: CHLC®), Treasury-Hedged High Yield Bond ETF (NYSE Arca: THHY), Investment Grade Floating Rate ETF (NYSE Arca: FLTR®), Emerging Markets Local Currency Bond ETF (NYSE Arca: EMLC®), Emerging Markets Aggregate Bond ETF (NYSE Arca: EMAGTM), Emerging Markets High Yield Bond ETF (NYSE Arca: HYEM®), International High Yield Bond ETF (NYSE Arca: IHY®) and Fallen Angel High Yield Bond ETF (NYSE Arca: ANGL®). As of December 31, 2013 the total assets for these ETFs amounted to approximately $1.4 billion.

1Refers to capital flows moving to countries with higher interest rates and/or expected changes in exchange rates.

2Refers to excessive debt accumulation that can lead to credit bubbles and/or price inflation, for example.

Please note that the information herein represents the opinion of the portfolio manager and these opinions may change at any time and from time to time. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. ©2014 Van Eck Global.

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Market Vectors exchange-traded products have been offered since 2006 and span many asset classes, including equities, fixed income (municipal and international bonds) and currency markets. The Market Vectors family totaled $22.1 billion in assets under management, making it the seventh largest ETP family in the U.S. and 10th largest worldwide as of December 31, 2013.

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