Immense global interest in China’s currency is leading foreign exchange giant FXCM to offer it as a trading pair to Australian investors. In what FXCM considers breaking new ground, China’s offshore trading unit known as the CNH should be available to trade via its Australian online platform from mid-2012. Enabling CNH to trade here follows its exclusive introduction to Hong Kong in 2010, where FXCM is now one of a few platform providers to offer the Chinese offshore currency to clients.
In Australia, FXCM plans to pit the US dollar against the CNH in response to client demand following a recent road show in Sydney. Not that FXCM Asia Pacific managing director Siju Daniel is under any illusions about trading volumes and strategies. CNH volumes in Hong Kong are tiny at about $US2.7 billion a day compared to $US4 trillion in global foreign exchange trades.
But Daniel isn’t deterred, saying he is more long-term focussed about trading volumes here, and offering the CNH is merely a start and an option available to clients. He points out that, in the past, he responded to a client request to pair the Australian dollar against the New Zealand dollar. And, if there’s future demand from clients, Daniel says he will consider pairing the Australian dollar and the CNH in his Australian platform.
Daniel acknowledges the USD/CNH pair in Australia won’t suit short-term traders or speculators as the band is too narrow, despite The People’s Bank of China recently lifting the trading range from 0.5 per cent to 1 per cent after daily fixing the yuan against the US dollar, euro and yen. Daniel says the USD/CNH pair will be more suited to financial institutions, corporations, importers, exporters and individual investors with a view of between three and 12 months. “We believe it can be an effective instrument for longer term positions, as companies deal with quarterly earnings and look six-to-12 months in advance,” he says. “You have the Americans constantly saying the yuan is too low and is causing trade imbalances. The yuan is fixed against the US dollar every day. Now, if you’re an Australian company and the yuan gets weaker, it can increase the cost of buying goods from China. Trading the USD/CNH in Australia can act as a hedge against rising prices for Chinese goods.”
Apart from growing trade between Australia and China, Daniel says including the USD/CNH pair in its existing platform is also a response to an expanding Chinese client base in Australia. He says his Chinese clients may have property and other investments in China, and are keen to take a position here. “The Australian currency has been a strong performer and that’s related to a growing Chinese economy,” Daniel says. “But our clients will also have a longer term view on the outlook for the Australia and Chinese economies and their currencies. And I am also aware that Australian investors have an appetite for trading instruments.” He says the USD/CNH pair enables unincorporated companies and investors in Australia to gain exposure, where they otherwise couldn’t, to the offshore Chinese currency. FXCM will provide free education on the USD/CNH pair via its website.
Andrew Taylor, market strategist for GFT, says there’s no plans to offer a CNH pairing in its Australian foreign exchange platform as the “major onshore yuan isn’t a free flowing market currency, although China is moving towards it in 2015/16”. “At this point, it can take months for the yuan to significantly change in value,” he says.
“Foreign currency is mostly about liquidity, leverage and intra-day trading.” He says risk on, risk off sentiment dominates foreign exchange trading. As the Australian dollar is a commodity driven currency, traders tend to buy it against the US dollar and Japanese yen when the global outlook appears brighter and confidence is improving. Traders tend to sell the Aussie against the US dollar and the yen on signs of slowing Chinese growth, European debt woes and an uncertain global outlook. “When there’s uncertainty (risk off), there’s a shift to the safe havens of US dollars, US treasuries and Japanese yen, otherwise known as low yielding assets,” Taylor says.
“On any given day, a trader will decide the theme – risk on or risk off – and accordingly move between different asset classes.” Taylor says Australia’s relatively higher interest rates are positive for the Australian dollar and carry trade – where traders borrow at a low interest rate and invest in higher yielding assets. But Taylor also cautions that potentially fast switching movements between a currency pair can more than offset the interest rate differential and result in losses.
Taylor says the euro against the US dollar and the US dollar against the yen account for the biggest daily volumes in foreign exchange trading. He says currency values react to demand and supply, which in turn will be influenced by a myriad of global factors, some including US payroll numbers, European debt woes and potential Japanese growth - or the lack of it.
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