Profiting from Trump and Xi at Mar-a-Lago
US-North Korea Second Summit
Two weeks ago, I discussed the upcoming second US-North Korea summit and how we utilized our proprietary Capital Deployment Index model to identify investment opportunities that will benefit from the denuclearization of North Korea.
Now that this second summit is happening this week, the course of negotiation is following earlier prediction, and is further supported by the Kim administrations close study of Vietnam’s economic model.
The earlier Kim-Xi summit in January of this year further supports that North Korea is setting themselves for success, receiving assurance from China, her closet ally, to proceed with trade talks
Kim currently has a clear path to revitalize his country and earn his place among leaders such as Deng Xiaoping and Nguyen Van Linh, two men responsible for the liberalization of the Chinese and Vietnamese economies respectively.
This is once-in-a-life-time opportunity for all parties involved.
Trump-Xi Signing Summit
According to both parties, the Trade War progress seems to have reached a milestone, with significant positive progress.
As in any trade war, there is always a parallel currency war boiling underneath the surface.
To counter US tariffs on Chinese goods, China had to devalue the Yuan to artificially boost exports while simultaneously making the dollar stronger, hurting US exports.
This is a two-pronged attack.
Over the last year, China allowed her currency to weaken by 11.27%, which is in-line with the 10% tariff the US had imposed on $200B of Chinese goods in September.
Before a possible “signing summit” with Trump at Mar-la-go, China will likely allow the RMB to strengthen further in order to:
1. Appease US demands
2. Buy more room for future negotiation rounds.
U.S. Trade Representative Robert Lighthizer has stressed the importance of a stable yuan as a pre-requisite for further trade talks between the U.S. and China. This is because the artificial devaluation of the RMB would decrease export prices, essentially countering US tariffs.
And don’t forget, the last time the Chinese currency fell dramatically, the U.S. stock markets suffered double digit drops in 2015.
Another upside is that by letting the yuan strengthening before “signing summit,” Xi gains more room to negotiate in the future in the event the summit with Trump doesn’t come to a favorable head.
But keep in mind, if Trump was to approve the tariff hike from 10% to 25% on Chinese goods, China may allow the RMB to weaken to previous resistance level of RMB6.97 per USD in order to soften blows from America.
How to Capitalize
With momentum on its side and without the intervention by the Chinese government, the RMB may strengthen further to RMB6.27 per dollar to even RMB6.05 per dollar.
Our suggestion to potentially profiting on a strengthening yuan is to go long on VanEck Vectors ChinaAMC China Bond ETF (NYSE: CBON), which comprises of 23 fixed-rate, renminbi-denominated bonds issued in China by Chinese credit, governmental, and quasi-governmental issuers.
The ETF is highly correlated to the RMB, and therefore it is sensitive and ultimately reflects the currency’s movement.
The Bottom Line
This week we've seen two milestone events on the world stage: the second Trump-Kim summit in Hanoi, and established progress of The Trade War.
I urge readers to imagine possible outcomes of the Trade War, and how these hypothetical situations could benefit us as investors.
One highly probably scenario is that China will allow the yuan to strengthen further to satisfy US demand, while creating room for tariff defense in case the Mar-a-Lago Summit fails.
If such an event happens, we can turn a profit by buying CBON, a basket of Renminbi-denominated locally-issued bonds, because its price closely tracks the yuan’s movement.
Keep an eye out for more of my messages, as I'll be continually providing some actionable investment opportunities as both events progress.
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