| HONG KONG, June 12
HONG KONG, June 12 An increasingly volatile
Chinese currency prone to bouts of weakness is breathing fresh
life into the yuan derivatives market in Hong Kong as more
investors look to hedge currency risks.
Enthusiasm for yuan currency futures, cross currency swaps,
deliverable forwards and other hedging instruments is likely to
persist as traders expect future movement of the yuan will be
harder to predict amid further FX market reform.
The "redback" fell sharply earlier this year and has only
recently shown signs of stabilising, marking its most sustained
depreciation since the landmark revaluation in 2005. The
correction was widely believed to be engineered by the central
bank to flush out speculators who saw the yuan as a one-way
However, in recent sessions the central bank has set a
series of surprisingly strong midpoints to guide the yuan
higher, fueling speculation it may be putting the currency back
on a gradual appreciation path.
Spot yuan gained 0.4 percent so far this week,
recovering some of its over 3 percent loss in the first five
months, yet the currency is still among the worst performers in
"More and more clients have started to tap hedging tools
this year as the yuan is quite volatile. We see daily trading
volume of cross currency swaps more than doubled from last
year," said a trader at a U.S. investment bank in Hong Kong.
A cross currency swap (CCS) is a financial instrument that
allows participants to exchange both principals and interest
payments denominated in two different currencies, which enables
investors to reduce FX and rate risks.
There are no accurate data on the turnover of CCS as it is
an over-the-counter (OTC) market, but traders estimate daily
trading volume is around $500 million and the tenor has been
extended to 10 years with longer ones not very active.
The boom in the CCS market has also benefited from the
flourishing offshore yuan bond market, where issuance so far
this year has already surpassed the total in 2013 due to heavy
CCS is frequently used by both "dim sum" bond issuers and
investors to swap yuan funds to dollars and vice versa. Usually
low CCS rates are favorable to dollar-based investors as they
can obtain cheap yuan funds with their dollars.
In a more transparent market which is monitored by the Hong
Kong Stock Exchange, turnover of yuan/dollar currency
futures has also jumped as investors either hedged more of their
yuan exposure or speculated on future movements of the currency.
The total trading volumes of the currency futures that were
first launched in September 2012 amounted to 97,832 contracts
from January to May, up 92 percent from a year earlier, while
peak volume for a single day exceeded 6,000 contracts in March,
according to the Hong Kong bourse.
Analysts are still divided on whether the yuan will gain or
lose against the dollar for the full year. This uncertainty and
two-way volatility marks a watershed from the non-stop and
steady appreciation in the past few years and adds to the
attractiveness of yuan derivative products.
Pessimism on the yuan persisted although short positions
fell to the smallest level since late February as some investors
took profits from their dollar long positions to the yuan, a
recent Reuters poll showed.
WEEK IN REVIEW:
* Equity index provider MSCI on Tuesday said it will not add
China's mainland-based A shares to its benchmark emerging
markets index but that the shares will remain on review for a
possible move in 2015.
* China Minmetals, a stat-owned enterprise, completed the
sale of a 2 billion yuan three-year dim sum bond, which
attracted 5.7 billion yuan from 88 orders, according to a term
sheet seen by Reuters.
* China has relaxed rules on how asset managers can utilise
their quotas for investing in its domestic capital markets,
according to a circular from the state market regulator seen by
* China Construction Bank (CCB), China's
second-largest lender, has been selected to become the first
clearing service for renminbi trading in London, the Financial
Times reported, citing people close to the decision.
CHART OF THE WEEK:
Yuan has become more volatile as the central bank aims to
shake out speculative money and deepens FX market reform: link.reuters.com/rym99v
China relaxes rules for asset managers on using RQFII quotas-
CNH Tracker-Narrowing yuan spread puts brake on offshore deposit
More stories about the CNH market
Daily onshore yuan reports
Daily China money market reports
Offshore yuan rate Onshore yuan rate
Offshore yuan dealt Onshore yuan on CFETS
THOMSON REUTERS SPEED GUIDES
(Editing by Kim Coghill)