Offshore Renminbi Spreads Close To Zero

Since the four trading day since 2015, the central parity of RMB against the US dollar has been quadruple down.

A number of bank foreign exchange traders believe that the US dollar has continued to strengthen in recent days, the sharp depreciation of the rouble triggered the surging of emerging market currencies, and the first annual depreciation since the exchange rate reform of the RMB exchange rate in 2014 has driven the recent RMB central parity price to continue to fall.

"Some arbitrage capital is selling RMB."

A Hongkong bank foreign exchange trader revealed that many international investment institutions could no longer tolerate the risk of arbitrage of RMB against the US dollar continued to narrow, and began selling the renminbi at the end of last year.

The so-called risk free arbitrage income of the RMB against the US dollar mainly includes the interest differential income between the RMB and the US dollar, and the appreciation gains of the RMB against the US dollar.

In the past few years, taking into account the average annual appreciation of RMB against the US dollar is nearly 2%, and the benchmark interest rate of RMB is 3% higher than that of the US dollar, the total yield of RMB risk free arbitrage to the US dollar can reach 5%, which is quite attractive to many international investment institutions.

However, with the expected warming of the Fed's interest rate hike ahead of schedule, coupled with the trend of two-way fluctuation of the RMB against the US dollar last year, some international investment banks even predicted that the RMB could fall to 6.3 against the US dollar in 2015. Under the current situation of Sino US interest rate unchanged, the risk free arbitrage benefit will drop to below 2% or even lower than the US dollar financing cost of the investment institution.

"Especially after the Central Bank of China (micro-blog) cut interest rates at the end of last year, arbitrage funds accelerated to withdraw."

The foreign exchange traders analyzed.

A more obvious sign is inside and outside the country.

The spreads are narrowing.

In the past, when the RMB appreciated against the US dollar, the Yuan's forward exchange rate against the US dollar in the non deliverable forward foreign exchange (NDF) market in Hongkong was basically at least 100 basis points higher than that in the territory.

The fluctuation of offshore RMB against the US dollar in the NDF market often reflects the expectations of overseas investment institutions for the appreciation of RMB in the future.

"At the beginning of last year, the RMB exchange rate began to fluctuate in two directions. The price gap began to narrow, and even the price convergence between the two countries was increasing."

He said.

In January 7th, the closing price of the US dollar to the RMB exchange rate was 6.2125 in the offshore market of Hongkong, indicating that the overseas institutions' expectation of RMB appreciation has cooled substantially.

However, there are

Traders think that the withdrawal of arbitrage funds is not the backstage driver of the recent weakening of the RMB exchange rate, because the profit effect of A shares is enough to make up for the loss of their risk free arbitrage.

They found that the buying of foreign exchange from domestic enterprises is the real driving force to keep the RMB exchange rate going down.

A large domestic bank foreign exchange trader revealed that many domestic traditional manufacturing enterprises' export business profits were only 2%-3%, because last year the cumulative depreciation rate of RMB against the US dollar was about 2.5%, which made these enterprises quickly adjust their own foreign currency assets structure, that is, increase a certain amount of US dollar assets to deal with RMB.

Risk.

Many companies even think that foreign exchange purchase is not enough to solve the exchange rate risk of export business, and they have intervened in the foreign exchange option market for hedging.

According to the twenty-first Century economic report, trading volume in the inter-bank foreign exchange option market totaled 50 billion US dollars as at the end of September last year, 2.3 times the volume in 2013.

The director of financial market of a joint-stock bank revealed that behind the sharp increase in foreign exchange options business, one is the strong demand for hedging against depreciation of the renminbi. The two is the regulation on bank's handling of RMB and foreign exchange derivatives business implemented by customers in August last year, allowing enterprises to buy options and sell foreign currency options at the same time, so that banks can customize their foreign exchange option hedging schemes based on the bearish Renminbi exchange rate for different periods and different buying and selling strategies.

In his view, these bearish renminbi foreign exchange options positions are also pushing the recent decline in the RMB exchange rate.

The reason is that banks do not compete with these bearish renminbi foreign exchange option positions in counterparty pactions, but instead convert them into corresponding spot foreign exchange pactions, or risk hedging in the inter-bank foreign exchange market, or find corresponding risk hedges in the international foreign exchange options trading market.

This means that these option positions are again flowing back to the spot foreign exchange market to lower the RMB exchange rate.

"Last year, the depreciation of the RMB against the US dollar was about 2.5%, making many exporters aware of the sharp increase in exchange rate risk. In the short term, the hedging of foreign exchange purchase and the hedging of RMB depreciation through foreign exchange options will not stop."

The foreign exchange traders of the large domestic banks said frankly.