Portfolio | How will investors profit from IMF adding Chinese yuan to basket?

It now seems likely the yuan will be included in the International Monetary Fund currency basket come October when a decision is expected, but how can investors profit from this move?

Firstly it depends on which yuan will be added to the currency basket, also known as Special Drawing Rights, as there are both onshore and offshore yuan markets and they don’t always move in tandem.

Analysts at BNP Paribas predict a combination of the two; the offshore rate, (also known by its ticker name CNH), being the more liquid, will act as the forex reference for the SDR exchange rate, while the onshore 3 month Shanghai Interbank Rate (SHIBOR) will be used as the interest rate reference.

The onshore yuan (CNY) alone wouldn’t work as foreign market participants would not be able to execute an SDR denominated transaction using the currently cocooned onshore system. They could only use the CNH rate but without an onshore rate for reference there could be a credibility issue, suggest bank analysts.

Should the yuan get joining rights the currency will likely strengthen from around 6.2 to 6.1 against the US dollar - a movement of almost 2 per cent - before stalling by year end, BNP Paribas analysts wrote.

Diverging policy objectives as the US Federal Reserve starts to raise rates while China’s central bank continues to drop them will mean the CNH likely weakens by early 2016.