Trading the USD/CNY Currency Pair
The USD/CNY foreign-exchange pairing measures the value of the US dollar against the Chinese yuan. Because of the controlled nature of the Chinese economy, if you’re spread betting on this pair you need to keep an eye on the politics. Here’s a chart of the exchange rate for the last few years.
First of all, it is important to note that the Chinese currency is referred to as the ‘renminbi’ and each unit is called a ‘yuan’. Basically just like you refer to sterling as pound, you can refer to renminbi as yuan and the term yuan can also be used to denote the Chinese currency in a general sense. The yuan is further divided into two kinds – one is called the onshore yuan, CNY, and the other is referred to as the offshore yuan, CNH. Both the CNY and CNH trade at exchange rates that are different to each other but the two rates are still ultimately controlled by the People’s Bank of China.
In particular, the CHN, the free flowing offshore version of the Chinese currency has seen surging volumes year on year. With the opening of more offshore centres such as the Shanghai Freetrade Zone trading in the currency keeps increasing.
As you can see, there has been a general decline in value, which means the US dollar is getting weaker or the Chinese yuan stronger, depending on your point of view. The People’s Bank of China works to control the currency exchange rate, mainly by using repurchase agreements, which it buys to inject liquidity into the economy. It is hard for the exchange rate to vary more than about 1%, unless the PBOC wants it to.
We’re all familiar with the dispute between the G20 and China over the value of the renminbi, which sees it keep the currency as weak as possible until the G20’s patience is about to snap, and then ensuring it remains stable for a while. As China grows, it will open the currency completely, which will then sport the kind of volumes seen in yen trading.
The Chinese premier Jingping has spoken about internationalization of the yuan, and loosening the hold on the currency. Considering the amount of trade between the US and China, the current conversion is extremely important for both economies. There has even been speculation that the Chinese yuan might in time become the major standard currency, replacing the US dollar if this continues to be devalued by quantitative easing. Reducing the amount of rate manipulation can be seen as an effort to make this possibility more palatable.
The yuan was fixed to the USA dollar at a flat rate of 8.27 yuan per each USA Dollar but in 2005 this peg was lifted and the currency was set at 8.11 yuan per United States Dollar. The People’s Bank of China decided to open the currency market further by encouraging foreign trade and making currency trading more efficient. Since the year 2006, the renminbi has been permitted to fluctuate within narrow boundaries set about a fixed base rate linked to a basket of global currencies. Under this ‘managed floating exchange rate system’ the yuan moves up or down according to supply and demand forces but the price is still reset the next day.
At present, the yuan is permitted to trade in a 4% band which equates to just 2% above or below the People’s Bank of China daily peg to the US dollar. In the past, the Bank of China would disregard the previous day’s trading levels when setting the new day’s price fix but this all changed in August 11, 2015 when the bank permitted the yuan to decrease in value by a substantial 1.9%. The Bank also stated that in future they would consider the previous day’s closing rate when setting the exchange rate for the new day. What this means is that supply and demand forces now play a bigger role in the price of the yuan. This also increases volatility of the Chinese currency but the yuan will remain linked to the US dollar and permitted to move up or down by up to 2% of the daily fix.
The US dollar has recently appreciated in value due to expectations of an increase in interest rates and due to the pegging of the yuan to the US dollar, this has also resulted in the yuan rising in value against most other majors. The Chinese national bank saw this as damaging to China’s export-led economy and the new fixing system will help see the Chinese yuan trade at a level more focused on economic fundamentals.
China? Brittle? Well, maybe not yet, but economic data from China over the past few years has been sending something of a warning beacon to traders worldwide. With exports to Europe struggling, China is now doing all it can to maintain employment growth and fuel domestic manufacturing demand to protect it from a slowdown. China’s slowdown, although not catastrophic will likely impact commodity prices particularly should export orders continue declining. In fact, there are two key themes affecting sentiment for China right now, slowing Chinese growth and Chinese monetary policy.
For the yen pairs, trade between China and Japan is the key mover that investors should watch. Trade flows are highly sensitive to relations between both countries, and [the] Diaoyu/Senkaku island dispute pushed exports from Japan to China in September 2012 down to yearly lows. The issue remains unsolved, and a further deterioration in conditions may continue to damage Japanese exports to China and thus weaken the yen.
What of the challenges? Opaque accounting practices, variable rule of law, markets still at the whim of government. Just as our kids should all be learning Mandarin, traders should be learning Chinese markets.
Policy initiatives are critical drivers and the Chinese authorities will want to ensure that money flows into productive assets rather than being misallocated as previously. The economy remains very unbalanced and so some rebalancing to the consumer will be essential in ensuring a smooth path.
With the Chinese authorities waking up to the fact that the traditional export-centric model may now have to change, traders will have to be on their toes to take advantage of opportunities resulting from weak economic data.
All this makes it difficult to put together a trading plan, regardless of technical analysis, unless you have some insight into the motives of the participating countries. However, the tools which governments use can be seen as major fixes, and in between times the markets will tend to move in accordance with other traders’ sentiments. Therefore by staying away from government interventions, to the extent that they can be anticipated, you can continue to spread bet on this pairing using regular technical analysis to anticipate other traders’ actions. You simply have to be alert for any unexpected news and interventions, and prepared to react.
Active Trading Ideas
- Traders seeking to profit if China continues to miss its growth targets, may wish to sell copper when it rallies.
- Those who believe a harder landing is likely could trade mining companies directly to gain exposure to the market through the underlying price of commodities, correlated to Chinese demand.
- Long commodity positions can be hedged by shorting AUD/USD. Remember though, this can be expensive to finance due to the high swap rates incurred.
USD/CNY Rolling Daily Spread Bet
With the proviso that this is a politically controlled currency pairing, and therefore should be approached with caution, it is possible to play on the day to day changes in price which are caused by fellow traders. The current price for a daily rolling bet is 62,717.5 – 62,817.5, in other words one US dollar buys just over six Chinese yuan. Suppose you feel bearish on this pairing, you might choose to stake £1 per point on a sell bet, at 62,717.5.
Perhaps your bet succeeds, and the price drops to 61,937.5 – 62,037.5. If you close your short spreadbet now, at a buying price of 62,037.5, then you would have made 62,717.5 minus 62,037.5 points, and this works out to 680 points. As you chose to stake £1 per point, that amounts to a win of £680.
You need to be ready to close your bet for a loss if it seems it is going the wrong way. You will have many losing bets, and it does not mean that your strategy is flawed, simply that it did not work this time. Say you closed your losing bet when the price was 63,107.5 – 63,207.5. Your bet was placed at 62,717.5, and it closed at 63,207.5, a gain of 490 points which counts against you, as you are in a short bet. Your loss would be £490.
If you do not have time to watch the markets, then you should consider placing a stop loss order when you take out your bet. This makes sure that your losing trade will be closed even if you’re not aware that the value has changed. The stop loss order in this case might have closed when the quote was 62,951.5 – 63,051.5. 63,051.5 less 62,717.5 is 334 points, so your loss using a stop loss order would be £334.
One last point. The Chinese Yuan Renminbi (USD/CNH) is considered an exotic currency pair. While it may look attractive to trade, expect wider spreads and do keep in mind that the market could gap on news resulting in some slippage where your trade order to buy or sell gets filled at a worse price than you were expecting.
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