– USD/CNH has seen aggressive price action around the adjustment to Offshore Yuan Overnight rates shooting up to a high of 66.82%.
– This essentially nullifies the prospect of staying long USD/CNH, as aggressive carrying costs combined with PBOC action make the up-trend in the pair very risky to stay long of.
– As we’ve been saying, for those that want to trade an Asian Slowdown, look to Japan. Last night’s rate adjustment is just another reminder that trading this theme in China brings on unknown and extraneous risks. Learn to manage your risk with Traits of Successful Traders.
So, I guess there is at least one area where rates are moving up, although this isn’t really the type of ‘rate rises’ that markets are looking for: Overnight rates on the offshore Yuan shot up to a high of 66.82%. That’s right – that is not a misprint. That is 6 thousand, six hundred and eighty two basis points. So before we go any further – I want to warn you about trading in USD/CNH. If you look at the chart, it would appear that a nice trend has formed. And to the trader, this can be a very good thing. But lurking under the surface is the non-predictability of a Central Bank that’s been backed into a corner. So be very careful if speculating here, especially in the direction of the trend because these overnight rates can be very, very, very costly.
But why would they do this?
Well, there are a few reasons. Key of which is something that American and European Central Bankers didn’t address during their QE-reigns, and that’s the impact of market forces. As in, the ECB announced their QE policy in July of 2014. By the time QE actually began to take place, the EUR/USD had already put in much of the move lower, and was actually weaker than where we are at now (almost a full year into Euro-QE), and this is because investors and traders had front-run the move. Central banks were ‘ok’ with this because it helped them accomplish their goal; they wanted a weaker currency so speculators selling it on the expectation of something that was going to happen was allowing them to move towards that. The chart below illustrates the timeline of European QE, and how the QE program beginning in March of 2015 actually called the near-low of the move, amazingly enough.