The “reval” trade: Sell Euro, buy Asia

The bottom line for currency traders, of course, is what the impact will be in the global currency markets if a revaluation occurs. Thomson Financial’s Rogers says a revaluation could mean “the endof the dollar sell-off against the European currencies.” In fact, he says the big play would be to sell Europe and buy Asian currencies.

“There will be a big asset shift in that direction,” he says.

Analysts agree a Chinese revaluation would likely result in the appreciation of a number of other Asian currencies, including those from Japan, Singapore, South Korea and Thailand. Cairns says a revaluation would likely “trigger a fresh wave of speculative inflow into the Asian currencies at the expense of the dollar. Asia, rather than Europe, should bear the brunt of such an adjustment, since many Asian economies have been attempting to target their currencies against the Chinese renminbi rather than the dollar. We feel this would turn the Euro/yen rate lower — a reversal of price action over the last two years.”

Rothsfield agreed that a big play off a reval scenario could be to sell the Euro and buy the Japanese yen.

The bottom line is that China will be the leader for other Asian nations. “The region as a whole will revalue based on what China does,” Dolan says.

Given the huge long-term implications of this scenario, forex traders will need to keep their eyes and ears open in 2005 and be prepared to adjust to an asset-allocation shift away from Europe and into Asia.