Searching for an effective hedge against renminbi (RMB) downside risk
After several years of stability, the on-shore RMB, off-shore RMB and Hong Kong dollar currency markets are confronting increased volatility, interest rate fluctuations and speculative attacks. Although these movements are all correlated, the potential outcomes are not.
Since peaking at 6.041 vs. the USD in early 2014 the CNY has subsequently weakened by 8.19% vs. the USD. A combination of slower economic growth, a volatile domestic financial market, narrowing interest rate differentials vs. the U.S. economy and policy missteps has not only challenged the belief that the currency is undervalued, but has also raised concerns about a hard landing for the Chinese economy.
With the CNY facing lots of bears and no bulls, currency speculators have focused on the off-shore CNH markets and the Hong Kong dollar markets. The fluctuations in HKD have been less severe, but, the younger and less liquid CNH market has experienced huge volatility as global financial markets search for an effective hedge against CNY downside risk.
CNH and CNY: The same, but different?
Off-shore CNH speculation and the reaction from the People’s Bank of China (PBoC)
Impact to China’s on-shore markets
Fig. 1A & 1B: CNY and CNH Currency and spreads
Fig. 2A & 2B: CNH Yields
Consistent with market expectations, the Federal Open Market Committee (the FOMC) left the Fed Funds rate unchanged, at 0.25%.
This month, without either a press conference or new dot plots (the Summary of Economic Projections, or SEPs), the FOMC was given limited options with which to answer the market’s question of whether or not December’s hike was a policy error. The Fed’s statement recognized recent slowdowns in growth and inflation expectations, but only marginally changed its outlook and forward guidance.
We can break the Committee’s statement into three parts:
NOT FOR RETAIL DISTRIBUTION: This communication has been prepared exclusively for institutional/wholesale/professional clients and qualified investors only as defined by local laws and regulations.
This document has been produced for information purposes only and as such the views contained herein are not to be taken as an advice or recommendation to buy or sell any investment or interest thereto. Reliance upon information in this material is at the sole discretion of the reader. The material was prepared without regard to specific objectives, financial situation or needs of any particular receiver. Any research in this document has been obtained and may have been acted upon by J.P. Morgan Asset Management for its own purpose. The results of such research are being made available as additional information and do not necessarily reflect the views of J.P.Morgan Asset Management.
Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are those of JPMorgan Asset Management, unless otherwise stated, as of the date of issuance. They are considered to be reliable at the time of writing, but no warranty as to the accuracy, and reliability or completeness in respect of any error or omission is accepted. They may be subject to change without reference or notification to you.
J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. This communication is issued by the following entities: in the United Kingdom by JPMorgan Asset Management (UK) Limited, which is authorized andregulated by the Financial Conduct Authority; in other EU jurisdictions by JPMorgan Asset Management (Europe) S.à r.l.; in Switzerland by J.P. Morgan (Suisse) SA, which is regulated by the Swiss Financial Market Supervisory Authority FINMA; in Hong Kong by JF Asset Management Limited, or JPMorgan Funds (Asia) Limited, or JPMorgan Asset Management Real Assets (Asia) Limited; in India by JPMorgan Asset Management India Private Limited; in Singapore by JPMorgan Asset Management (Singapore) Limited, or JPMorgan Asset Management Real Assets (Singapore) Pte Ltd; in Australia by JPMorgan Asset Management (Australia) Limited ; in Taiwan by JPMorgan Asset Management (Taiwan) Limited; in Brazil by Banco J.P. Morgan S.A.; in Canada by JPMorgan Asset Management (Canada) Inc., and in the United States by JPMorgan Distribution Services Inc. and J.P. Morgan Institutional Investments, Inc., both members of FINRA/SIPC.; and J.P. Morgan Investment Management Inc.
Copyright 2015 JPMorgan Chase & Co. All rights reserved.