Renminbi – Opening up globally through swaps

Chinese Renminbi (RMB) last year remained among the few currencies outperforming dollar. This year so far it has underperformed, as the monetary policy diverged. CNY is currently trading around 6.25 against the dollar.

People's Bank of China (PBOC) sought to ease amid a slowing economy and impaired state finances.

We believe three trends to continue in china -

a)     Government crackdown on corruption, tax evasion and opaque financing deal. The metal financing deals are not very transparent in china, sometimes aiming to pocket rate differentials. These practices have taken and will be taking hit both form government's crackdown and PBOC easing.

b)    Bearish CNY to continue weakening against the dollar due to slowing economy, reversing the deals as rate differential disappears through PBOC easing & hawkish FED.

c)     Internationalizing the currency to continue. Canada was the latest country to seal a 3 year swap agreement worth RMB 200 billion. China has sealed similar arrangements with US, Singapore, France, Korea & Germany as of May 2014, only 1.5% of the global trade was being settled in RMB, by the end of the year RMB settlement was sitting at 2.2% just behind the JPY (2.7%).

For now the  volatility in RMB remains still smaller due its managing status by china, we believe the RMB will be of more interest in the coming time.