Forex Comment Feb 22

Yuan looking to overtake the pound and yen in forex trade

With the large amount of foreign investment flowing into Chinese bonds, the RMB/yuan has become a focus of international attention

Yuan looking to overtake the pound and yen in forex trade
Image: AFP.

(ATF) China’s economy is seeing a rapid recovery with yuan assets being sought by overseas funds, according to local news outlet Phoenix TV. The yuan itself has also become the focus of attention in the international foreign exchange market.

The Bank of England's semi-annual survey of foreign exchange trading volume has reported that London, the world's largest foreign-exchange trading centre, saw instances when the daily trading volume of yuan options surpassed the yen and the pound for “the first time in history.”

With the participation of a large number of hedge funds, the abundant liquidity in the overseas yuan and foreign exchange trading market has also greatly reduced the cost of transactions.

As one of the world's largest market makers, Kevin Kimmel, the global head of Citadel Securities' electronic foreign exchange business, said that the current transaction cost per US$1 million for yuan foreign exchange transactions is only about $20, which is equivalent to deals involving the British pound, and far from the euro. The US dollar, the world’s most liquid currency, is not far from $10 for such a transaction. For emerging market currencies, this transaction cost is usually higher than $100.

Bloomberg quoted Kimmel as saying that from the current situation of yuan foreign exchange transactions, "it is certainly one of the most important currencies... yuan trading activities have seen a significant increase."

The above report by the Bank of England showed that in October last year, the average daily trading volume of yuan in the London market reached a record high of $84.5 billion. That month, the average daily trading volume of yuan options also reached a record $11.7 billion. And the average daily trading volume of forward contracts was close to $12 billion, a record high since 2019.

In North America, the average daily trading volume of yuan also reached $7.8 billion, a year-on-year increase of more than double. 

EBS, a foreign-exchange spot-trading platform under the Chicago Mercantile Exchange (CME), said that from 2015 to 2020, yuan foreign-exchange spot-trading volume increased by 90% and 131% on its platforms in London and New York, respectively.

The reason for the change is reportedly mainly due to the continuous influx of foreign capital into Chinese assets over the past year. An example is the record high rate of foreign-capital taking positions in Chinese bonds in January this year.

Higher yields are the most important reason for attracting these funds. The current 10-year Treasury bond yield in China is 3.268%. In contrast, the 10-year Treasury bond yield in the United States is only 1.357% and the German Treasury bond yield is -0.306%.


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