China spreads widen but currency weakens.

With all the talk of an over heating economy in China and the need for the currency to appreciate all I see is opportunity for the contrarian in this currency pair.

For the last few months (4-7 months) I have been watching this currency pair and have been sitting long dollars. With the widening of the spreads (as interest rates in China have continued higher) the currency has not strengthened accordingly. Actually it has strongly lagged. I see no change in this pace for the near term and as such I remain long dollars. The spreads can widen all they want but if the currency does not appriciate accordingly there is tremendous opportunity to be long dollars. Even if the pace increases it has to outpace the spread before you start to lose money. The more cautious amongst us can use this (at the very least) as a funding currency.

As for the Euro. It looks to me like we are in a mini retrace before we make a move to all time new highs (before testing 1.4000 ??). I am currently square this currency pair, but will be looking to get long again shortly. I will keep you posted.

Good Luck and Good Trading.