RMB Foreign Exchange Arbitrage Trading Ebb Tide

As of 18 January 14th, the offshore dollar to spot exchange rate (CNH) was hovering around 6.6184, which was about 300 basis points lower than the spot exchange rate of the domestic onshore RMB.

"Will the convergence wars be staged?" Zhang Gang, an American hedge fund manager, quipped.

On Monday, under the pressure of China's central bank's strong intervention in the foreign exchange market, the exchange rate between the RMB and the US dollar at home and abroad once smoothed the exchange rate of more than 1600 base points.

In Zhang Gang's view, the central bank's intervention in the foreign exchange market has achieved the expected effect. That is, by smoothing the huge exchange rate differences between China and foreign countries, it will also pave the way for the RMB to enter the SDR reserve currency smoothly in September this year.

However, the international speculative capital seems to have not yet withdrawn.

"On the 14 day, the RMB exchange rate within and outside the territory still reaches more than 300 basis points, indicating that there is also international speculative capital in selling renminbi arbitrage."

A foreign exchange trader at a Hongkong bank said.

In his view, the main reason for the comeback of international speculative capital is that the Central Bank of China has changed the RMB exchange rate formation mechanism from pegging the US dollar to a basket of currencies, making the market expect the RMB to depreciate to a certain extent against the US dollar, so they began to look for opportunities to bet on the depreciation of the RMB.

"This kind of war is probably continuing in another way."

Zhang Gang said frankly.

"In the past, arbitrage pactions would be profitable if there were more than 200 basis points in the domestic and foreign RMB exchange rate."

The foreign exchange trader pointed out.

However, after the soaring interest rate setting rate of offshore renminbi Hibor in Hongkong this week, the difference between the domestic and foreign RMB exchange rate of such arbitrage pactions is as high as 300-400 basis points.

Even if the RMB exchange rate difference reached about 300 basis points within 14 days, it is still not enough for such arbitrage pactions to come back.

He believes that another important reason for the prohibitive exchange arbitrage trade in the renminbi is that the international speculative capital is worried that the central bank will take more capital control measures to further curb the cross-border movement of speculative capital, thereby cutting off the sources of funds for such arbitrage pactions.

"From the analysis of a series of combined punches taken by the central bank to intervene in the foreign exchange market, the central bank seems to realize that the huge amount of cross-border capital flows hidden in such arbitrage exchanges may take a drastic solution, that is, to enhance the verification of false trade, or to strengthen the supervision of idle funds in the process of RMB settlement in cross-border trade.

Unable to get enough RMB capital to carry out arbitrage.

He said that once the scale of arbitrage trading has shrunk, the phenomenon of domestic capital outflow has been effectively curbed, making international speculative capital unable to arbitrage RMB arbitrage in the offshore market with the help of China's huge foreign exchange reserves and capital outflows.

However, many reporters have learned that some international speculative capital has also been changing strategies recently, instead of borrowing Renminbi from Europe and the United States and continuing to sell short Renminbi strategy.

"After all, these countries do not have enough renminbi to use, and there are many idle renminbi, which can be refunded to Hongkong with a relatively cheap financing cost and sold as a continuous capital reserve for the renminbi."

Zhang Gang said.

However, he found that because of the devaluation of the renminbi, many overseas banks are also raising the interest rate of Renminbi lending to hedge exchange rate risk, and virtually make the foreign exchange arbitrage pactions in the RMB real.

Improved.

"In fact, more international speculative capital is already adjusting the expected depreciation of the renminbi - before they bet on a significant depreciation of the renminbi, and now they tend to moderate the depreciation of the renminbi."

He said.

Even some international agencies have lowered the value of the yuan in the coming year from 10% to 5%.

However, with the expansion of the RMB exchange rate within 14 days, there is still a stubborn RMB short selling force in the financial market.

"It is not ruled out that they will try to find out whether the central bank will intervene in the foreign exchange market again by expanding the RMB exchange rate between the two countries."

Zhang Gang thinks.

In fact, they are carrying out a big gamble. In the background of the strong appreciation of the dollar and the rising expectation of other currencies, the Central Bank of China does not use large amounts of foreign exchange reserves to intervene continuously.

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After the central bank strongly intervened in the foreign exchange market on Monday, the speculative tide in the short selling period was ebbing, especially in the renminbi.

The reason for this is that the fixed interest rate of offshore RMB Hibor in Hongkong has surged recently, and the cost of leveraged financing has been greatly increased. This has forced the international speculative institutions to pay more margin to maintain the scale of the existing arbitrage trading and make it profitable.