Forex Industry Members Weigh In On Yuan Devaluation

Not too long ago, the Swiss National Bank (SNB) shocked the forex industry with its decision to scrap the franc peg. This week, currency intervention ghosts haunted the financial markets when the Chinese central bank made aggressive efforts to devalue the yuan.

As Pip Diddy shared in his trading session updates, the People’s Bank of China (PBOC) has been adjusting the yuan reference rate for the past few days in order to allow their local currency to depreciate against its forex rivals. In doing so, policymakers are able to make Chinese exports relatively cheaper, thereby boosting demand. At the same time, yuan devaluation also makes imported goods more expensive, pushing domestic inflation up.

Forex traders who happened to hold long USD/CNH positions probably enjoyed gains of more than a thousand pips after Tuesday’s PBOC announcement. At that time, the central bank set the reference rate 1.9% lower – its largest currency devaluation in two decades. This was followed by a 1.6% adjustment the next day then by a 1.1% reduction earlier today, spurring volatile moves for the Chinese currency.

USD/CNH 4-hour Forex Chart

USD/CNH 4-hour Forex Chart

Yowza! Just like waking a crazy monster from its peaceful slumber! Were brokers and client accounts chopped up again?

Not so much. Keep in mind that not all forex brokers offer Chinese yuan pairs in their platforms unlike the Swiss franc. Apart from that, several traders might’ve steered clear of the Chinese yuan since it’s only allowed to float within a fixed range set by the central bank. Not much fun to trade, is it? Because of that, the effect on the forex industry was just limited to a handful of players, with some brokers saying that the sudden sharp moves won’t have a material impact on company profitability.

According to GAIN Capital’s Chief Executive Glenn Stevens (Nope, not the RBA Governor), the devaluation of the Chinese currency won’t have an adverse effect on their financial results. “Customer trading activity in yuan-related currency pairs constitutes an immaterial part of our overall trading volume,” he explained while speaking at the Jefferies Financial Services Conference.

“As part of our risk management program, we take a conservative approach to managing our exposure to pegged currencies so that we are well positioned in the event of unexpected central bank policy changes,” Stevens added. “Specifically, in the case of the yuan, we took steps to significantly limit the maximum notional size of our exposure to yuan-linked currency pairs and other products, which we believed was prudent in light of the yuan peg and the other conditions in the Chinese financial markets.”

So far, forex brokers don’t seem to be complaining about the PBOC’s consecutive devaluations, as companies seem to have taken steps to ensure proper risk management after the SNB shocker. However, a few industry experts warned that this could mark the start of a new currency regime in China – something that all forex junkies should be aware of.

Keep in mind that the PBOC mentioned that it will allow the market to play a bigger role in exchange rate determination and will open up the yuan for more forex trading exposure. “Foreign exchange market development will be accelerated and foreign exchange products will be enriched,” its official statement indicated. “In addition, the PBOC will push forward the opening-up of the foreign exchange market, extending FX trading hours, introducing qualified foreign institutions and promoting the formation of a single exchange rate in both on-shore and off-shore markets.”

For Khoon Goh, a Singapore-based strategist at Australia & New Zealand Banking Group Ltd, this could mark the end of currency fixing and pave the way for a market-based determination of the yuan’s trading levels. This is in line with the IMF’s recommendations, increasing the yuan’s chances of being promoted to reserve currency status. Do you think the Chinese yuan will someday be a part of the major currency gang?