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China FX Markets yuan

As Yuan Turns More Volatile Than Euro, Turnover Soars

"Avoid herd behavior."

Guess what? Folks are trading the yuan.

Over the least three months, markets have been at pains to discern what the controlling factor is for the Chinese currency’s rapid depreciation.

To be sure, everyone can make a list of the contributing factors, it’s just a matter of deciding which one takes precedence.

The narrative here is simple. Some combination of trade war jitters, decelerating Chinese economic activity and monetary policy divergence between the Fed and the PBoC pushed the yuan to its weakest against the dollar since last summer.

In early June of 2017, the PBoC engineered an epic short squeeze in the currency by instituting a laughably opaque “counter-cyclical adjustment factor” in the daily fixing. That arguably served to roll back some of the liberalization that was supposedly inherent in the 2015 devaluation. In the months after the CCAF was introduced, the yuan staged a record-setting rally. Through September 4, 2017, for instance, the offshore yuan rose for 14 consecutive sessions against the dollar, prompting China to slam the brakes on by lifting rules on forwards put in place in 2015. In short, that didn’t work. The yuan weakened initially, but strengthened anew going into 2018. In January, the PBoC repealed the CCAF in another effort to put the brakes on the yuan rally, but that didn’t work either.

What did “work”, though, when it came to arresting the rally in the yuan, was Donald Trump’s decision to launch an all-out trade war with China. That, coupled with a Fed that remained steadfast in its relative hawkishness against a backdrop of a U.S. economy turbocharged by late-cycle stimulus, ended up catalyzing a rapid reversal of fortunes for the yuan, which weakened at the fastest pace since 2015 through July. The PBoC was happy to countenance that depreciation, because after all, it ultimately negated the effects of the first two rounds of 301 investigation-related tariffs before they were even fully implemented.

But when the yuan started looking like it wanted to make a run at the psychologically important 7-handle, China quickly moved in to engineer stability with a four-step approach. First, Beijing reinstated the forwards rules (August 3) mentioned above. Second, authorities chided onshore banks for selling RMB (August 7). Third, Beijing moved to squeeze offshore liquidity (August 16). Finally, last Friday, they reinstated the CCAF. Here’s the annotated chart:

RMB

USDCNH was trading at 6.82 on Wednesday, down markedly from 6.95 hit earlier this month at the height of the Turkey panic.

CNH

(Bloomberg)

Well, as Bloomberg reports, turnover in the offshore yuan jumped dramatically in July as traders struggled to comprehend which of the various factors mentioned here at the outset was steering the ship and as everyone attempted to price the unpriceable: Donald Trump’s “very good brain”.

“On the FX trading platform of Cboe Global Markets, average daily volume in dollar-offshore yuan jumped to a record $1.7 billion in July, from $421 million a year earlier”, Bloomberg writes, in an article out Wednesday afternoon, adding that “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 percent.”

Although activity in the onshore yuan has risen as well, the offshore market is obviously where the action is for speculators.

In a testament to all of the above, it’s worth noting that for the first time in history, the offshore yuan is more volatile than the euro based on 30-day realized.

YuanEuroVol

(Bloomberg)

As the PBoC would say: “Avoid herd behavior.”

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