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