Yuan internationalisation likely delayed by euro and pound volatility, says BOCHK economist

The process of yuan internationalisation may face a setback as volatility in the world’s two largest reserve currencies - the British pound and the euro - are pushing the very foundation of the global monetary order into question, warned Bank of China Hong Kong (BOCHK) on Wednesday.

E Zhihuan, chief economist at BOCHK said: “The financial markets have been the biggest casualty in the Brexit event. Forex volatility has risen steeply. We could already see individual defaults in market trading as a result of the rise of the significant pressures.”

“The volatility and risks observed in currencies have been much more significant in what we see in equities,” she added. “Brexit has not only affected the pound. What is to become the role of euro? There is now a lot of concern over its future. It is after all an experimental currency.”

Rating agency Moody’s also lowered its outlook across the board for 12 British banks. These apply to HSBC and Barclays, which the Financial Stability Board designated “globally systematically important banks” as both are key counterparties in wholesale trading of capital markets across a spectrum of derivatives products essential for the functioning currency markets.

Sam Ahmed, managing director of Deriv Asia, an advisor behind a number of Asian investment banks’ in derivatives trade frameworks focused on their credit risk policy and collaterals settings, told the Post that risk officers in major banks could be expected to start upping margins and collateral requirements when they trade against British banks in over-the-counter settings.

Ahmed said any further action from the rating agencies in the next three months could see trading desks across the board start tightening their thresholds and exposures when dealing with British banks. Such an outcome could further disrupt the functional order of London as a global international centre.