Volume 7, No. 1, April 2008

 
Forecasting the Chinese Yuan-US Dollar Exchange Rate under the New Chinese Exchange Rate Regime
Imad A. Moosa
Department of Accounting and Finance, Monash University, Australia
Abstract
Two models are specified, estimated, and used to generate out-of-sample forecasts over the period since China announced a shift in exchange rate policy from a simple peg to the US dollar to a basket peg. The results show that the model that is based on a crawling peg is far superior to the model that is based on a basket peg. It is also shown that trading the Chinese yuan versus the US dollar is more profitable than otherwise when trading is based on the assumption of a crawling peg, in which case buy and hold is the best strategy. It is concluded that China must be using a crawling peg, which is not good news for the US but may be good news for foreign exchange traders.
Key words: Chinese yuan; exchange rate regimes; forecasting
JEL classification: F31; F33

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