Steady yuan gains fuel derivatives market growth

Published: 9:32 PM, September 23, 2013
Updated: 6:20 PM, September 24, 2013
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HONG KONG – The yuan’s quiet strength against the US dollar amid an emerging market selloff has spurred growth of the offshore derivatives market in China’s currency.

As Asian currencies such as the Indian rupee have tumbled to record lows, the Chinese currency has gone in the other direction to hit record highs, prompting banks and companies to hedge and speculate on the yuan in Hong Kong and London.

Spot yuan traded at 6.1190 per US dollar on Monday, having appreciated 1.8 per cent so far this year, the only major currency in Asia to have firmed against the US dollar in 2013.

Among recent reforms, Beijing has widened the scope of a few pilot projects in cross-border yuan trade settlement, increased onshore investment quotas and even dangled the possibility of a wider yuan trading band.

That has started to pay off as international trade in the currency has increased to the point where a sixth of China’s global trade is now denominated in yuan, forcing company treasurers to look at hedging their currency risk.

“The CNH (offshore yuan) options market has gone from strength to strength in the past few months as more companies have started adopting the yuan as a payment currency,” said Mr Patrick Wu, JP Morgan’s head of trading for China.

He said the offshore yuan option volumes at his bank had grown by three to five times since the year began. That is a big shift for firms which used to hedge yuan exposure only with offshore non-deliverable forwards (NDF).

NDF contracts, benchmarked to the China central bank’s onshore fixing rate, have become an imperfect barometer of market expectations, especially as Beijing has relaxed its grip by promoting more two-way trading.

Instead, the CNH market has proved a better proxy for the onshore currency rate in recent months as Beijing has dismantled restrictions on cross-border yuan flows for trade purposes.

Mr Ivan Wong, head of corporate sales for Greater China at HSBC, estimated that CNH FX options volumes had surpassed those in the NDFs market.

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