On the FX trading platform of Cboe Global Markets, average daily volume in dollar-offshore yuan jumped to a record $1.7bn in July, from $421mn a year earlier. EBS Market, NEX Group Plc’s FX trading system, also saw a new high in offshore yuan transactions last month, exceeding the previous peak by 17%.
The volumes, which represent a portion of the offshore yuan market, surged as the yuan slid for a fourth straight month. The drop raised speculation that China was deliberately weakening the currency amid its intensifying tariff impasse with America.
Last week’s announcement by the People’s Bank of China’s that banks would resume use of the counter-cyclical factor in setting the yuan’s daily reference rate may further fuel activity, in the view of Brad Bechtel at Jefferies.
The fixing adjustment works to restrain market influences, meaning it will have to compete with forces such as tense trade negotiations and slowing Chinese growth.
That tug-of-war should increase volatility, said Bechtel.
“If anything, it creates a more tradeable market,” said Bechtel, the firm’s global head of foreign exchange.
The PBoC is “pushing back against what the market’s doing, but at the same time, there are still a lot of variables.”
The offshore yuan, or CNH, dropped 0.34% to 6.8454 per dollar yesterday in Hong Kong.
It has slumped 6.3% since mid-June as the two nations exchanged tit-for- tat tariff threats, adding to swings in emerging-market currencies. The pace of the decline prompted the PBoC to ask Chinese lenders to discourage “herd behaviour” and momentum-chasing in the currency.
The offshore yuan’s weakness was likely driven by the same momentum-chasers that the PBoC was trying to curtail, according to Mingze Wu, a currency trader at INTL FCStone in Singapore.
The offshore yuan “has better accessibility for speculators,” Wu said via e-mail. “As such, I would not be surprised if the increase in volume has been mostly speculative driven.”
Despite the recent declines, there’s no sign of intense positioning for further depreciation in the derivatives market or significant capital outflows. Overseas hedge fund managers have been refraining from betting against the currency like they did a few years ago, and mainland individual investors are less keen on hoarding the dollar.
The transaction volume has also picked up in the onshore market, which is more tightly controlled by the central bank and is dominated by mainland investors.
Data from the China Foreign Exchange Trade System, an interbank trading platform affiliated with the PBoC, show that average onshore yuan turnover in late July reached the highest level since January 2017.
“The trading volume will likely hold steady at the current levels as sentiment towards the currency has stabilised, thanks to the re-introduction of the counter-cyclical factor,” said Ken Cheung, Hong Kong-based senior Asian currency strategist at Mizuho Bank. “Investors no longer feel the rush to cut their positions.”
The turbulence has made this summer the busiest in years for Cheung, with clients and media inquiring about the yuan’s decline and its implications.
“Activity levels definitely increased across the client base,” he said. “There are those who are always involved or looking at it, but when it starts to move like this, a lot of folks jump on board.”
