Transactions of offshore renminbi soar in forex markets even as Trump slams China on currency

Turnover in the offshore yuan has reached unprecedented levels, spurred by US President Donald Trump’s broadsides against Chinese currency practices and the protracted trade dispute between the world’s two biggest economies.

On the FX trading platform of CBOE Global Markets, average daily volume in dollar-offshore yuan jumped to a record US$1.7 billion in July, from US$421 million a year earlier. EBS Market, NEX Group’s FX trading system, also saw a new high in offshore yuan transactions last month, exceeding the previous peak by 17 per cent.

The volumes, which represent a portion of the offshore yuan market, surged as the yuan slid for a fourth straight month. The drop raised speculation that China was deliberately weakening the currency amid its intensifying tariff impasse with America.

Last week’s announcement by the People’s Bank of China (PBOC) that banks would resume use of the counter-cyclical factor in setting the yuan’s daily reference rate may further fuel activity, in the view of Brad Bechtel at Jefferies.

The fixing adjustment works to restrain market influences, meaning it will have to compete with forces such as tense trade negotiations and slowing Chinese growth. That tug of war should increase volatility, said Bechtel.

“If anything, it creates a more tradeable market,” said Bechtel, the firm’s global head of foreign exchange. The PBOC is “pushing back against what the market’s doing, but at the same time, there are still a lot of variables.”

The offshore yuan, or CNH, was around 6.8189 per dollar as of 6:17am Thursday in Hong Kong. It has slumped about 6 per cent since mid-June as the two nations exchanged tit-for-tat tariff threats, adding to swings in emerging-market currencies.

The pace of the decline prompted the PBOC to ask Chinese lenders to discourage “herd behaviour” and momentum-chasing in the currency. While implied one-month volatility in the dollar-offshore yuan has dropped the past few days, its 50-day moving average is still the highest since 2016.

The offshore yuan’s weakness was likely driven by the same momentum-chasers that the PBOC was trying to curtail, according to Wu Mingze , a currency trader at INTL FCStone in Singapore.

The offshore yuan “has better accessibility for speculators,” Wu said via email. “As such, I would not be surprised if the increase in volume has been mostly speculative driven.”

Activity in the onshore yuan - which is only accessible to China-based investors - has been picking up as well. Data from China Foreign Exchange Trade System, an interbank trading platform affiliated with the PBOC, show that onshore yuan turnover in late July reached the highest level since January 2017.

“The trading volume is likely to hold steady at the current levels as sentiment towards the currency has stabilised, thanks to the re-introduction of the counter-cyclical factor,” said Ken Cheung, Hong Kong-based senior Asian currency strategist at Mizuho Bank. “Investors no longer feel the rush to cut their positions.”

The turbulence has made this summer the busiest in years for Cheung, with clients and media inquiring about the yuan’s decline and its implications.

Bechtel can relate.

“Activity levels definitely increased across the client base,” he said. “There are those who are always involved or looking at it, but when it starts to move like this, a lot of folks jump on board.”