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China's Yuan: A Stunning Multi-Year Forecast

Our Global Opportunities Expert discusses his view of CNY vs the U.S. dollar

by Alexandra Lienhard
Updated: November 22, 2016

Chris Carolan, the editor of our Asian-Pacific Short Term Update and European Short Term Update, outlines his forecasts for the Chinese yuan and shows you how he stayed one step ahead of China's currency devaluation steps.

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[Editor's note: The text version of this interview is below.]

Alexandra Lienhard: I'm Alexandra Lienhard for ElliottWaveTV, and today I'm joined by Chris Carolan. Chris is Elliott Wave International's Global Opportunities Expert and the editor of our Asian-Pacific Short Term Update and European Short Term Update. Hi Chris, good to see you again.

Chris Carolan: Good to see you, Alexandra.

Alexandra: So, I want to focus today' discussion on Asia, and I want to start off by talking about a call that you actually made over a year-and-a-half ago. Prior to the Chinese revaluation, you made a bold forecast regarding the yuan. I wanted you to take me through that call and talk about a bit about what you were looking at and what subsequently happened since.

Chris: Well, you know the yuan was strengthening for many years. It had a 19-year bull market, and in Elliott wave terms it had completed 5 waves. Once it completed 5 waves, we were looking for a substantial move in the other direction -- that is, a yuan devaluation. Then, early in 2015, it began that slight decline and it did what we call a 1-2-1-2 Elliott wave count, which indicates that a very strong move was eminent, a very sharp move. In July of 2015, I put out analysis looking for this 3rd of a 3rd wave decline in the yuan, the devaluation wave. I also tossed out a target of 6.8 yuan-to-dollar. At the time, it was trading 6.2 so 6.8 was pretty far away. Literally the next week was the first shoe to drop where the Chinese authorities did a small devaluation, but it sent a shockwave through the markets. Since then, we've just seen the yuan steadily decline, and we've also seen the U.S. dollar steadily rally. The trend now moves contrary to what had been that 19-year bull market in the Chinese currency.

Alexandra: Now Chris, to stress, you actually made that call prior to the Chinese revaluation which is impressive. So now that your targets have been hit, in your opinion, is the top in?

Chris: No, it isn't. We looked at that 6.8 yuan per dollar target that we had in 2015, that's what's called the previous 4th wave level. In Elliott wave terms, when a market completes five waves and you're looking for a countertrend move, that move back to the previous 4th wave, that's sort of the minimum of what we were looking for. That was the initial target, we reached that, we exceeded that, but that was in no way an implied final price for the yuan move.

Alexandra: Many cite that one of reasons for a weaker yuan is a strong, but slowing economy in China. I wanted to bring up the topic of deflation. Do you see that being an issue in China -- and specifically, is China "exporting" deflation?

Chris: Well, yes, they are exporting deflation. Everybody wants their currency to be cheaper -- because when it's cheaper, then you can sell more of your goods abroad. So, the falling Chinese currency is going to mean Chinese goods in the U.S. are cheaper. That's deflation coming to the U.S. shores. The U.S. dollar is strong now, not just against the yuan, but quite a lot of other countries. So many other countries want to inflate their way out of their lackadaisical economies, and the dollar rally is letting these other countries do this. But it ultimately will impose a cost on us, a deflationary cost.

Alexandra: Now the Chinese authorities have been openly discussing a move towards a trade-weighted basket as opposed to the current peg. Do you see that likely to happen anytime soon?

Chris: Well, they've put together a basket and they're fixing the yuan not just against the U.S. dollar, but also against a basket. The Chinese authorities want to divert attention away from just the yuan-dollar relationship and position their currency in a broader regional framework. But it really does come down to the dollar being the reserved currency. The yuan-dollar relationship really still is the primary thing that markets are watching, even though the authorities are trying to divert themselves away from it. The authorities try to restrict what people can do, and people will do various methods to try and circumvent that.

Alexandra: Well, there's certainly a lot of stories to talk about in the Asia-Pacific region. I appreciate you taking a couple of minutes to offer your perspective. Thanks, Chris.

Chris: I'm happy to be here.

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