Arbitrage Funds Withdraw From The NDF Market

In March 2nd, the spot exchange rate of RMB against the US dollar opened at 6.2730, once again the lowest level since October 12, 2012. Intraday, once fell to 6.2733, compared with the mid day price drop of about 1.98%, once again close to the limit.

This is also the renminbi's spot rate for the four consecutive trading day approaching the limit after the Spring Festival.

"Unlike the previous three trading days, the exchange rate difference led to a downward trend in the RMB exchange rate. Today, the trend behind this trend has changed back to the withdrawal of arbitrage funds." A foreign exchange trader in Hongkong bank analyzed the logic of the market. In the morning, the offshore RMB market of Hongkong's non deliverable forward exchange (NDF) market appeared to be heavily sold, leading to an immediate exchange rate of 6.3021 against the US dollar, reaching the lowest level in the past 28 months, leading to a sharp fall in the spot exchange rate of the domestic Renminbi.

In his view, with the central bank to enter the cycle of interest rates, arbitrage capital withdrawal will become a new normal. Because they find that the appreciation of the renminbi has become unprofitable, especially for individual foreign investment banks, which expect the Central Bank of China to cut interest rates by 50-75 basis points, and will substantially reduce the real yield of the renminbi yen spread trading.

"What is most discussed by international investment institutions is how much capital outflow will be triggered by China's interest rate cut cycle, which may change some of the monetary policies of the regulators, such as lowering the deposit reserve ratio, in order to maintain a relatively loose monetary environment to support China's economic growth." He speaks frankly, some international. Investment institution It even serves as a policy guideline for further betting on devaluation of the renminbi.

　　 NDF Market RMB short

In the view of the foreign exchange trader, the central parity rate of RMB against the US dollar in March 2nd was 6.1513, which was only 38 basis points lower than the previous trading day. It seems that it intends to stabilize the fluctuation range of the RMB exchange rate.

But on the same day, many international investors have sold Renminbi in Hongkong NDF market.

"Some institutions sold $2000-3000 worth of Renminbi in the early morning, feeling like a collective escape." He said. But this is not surprising, because within one hour of the central bank's announcement of a rate cut, he received orders from three international investment institutions to sell his 50% yuan position on Monday morning.

In his view, the reason why these institutions are eager to sell the renminbi is mainly because the renminbi yen interest rate trading they are good at has failed to achieve the expected value of their earnings. In the past, the yen net interest rate net annual net risk free net income was close to 6-7%. But China has entered the cycle of interest rate cuts, and the appreciation of the renminbi has slowed sharply against the Japanese yen. The actual yield of the yen to Renminbi interest rate transaction may shrink to 4%, rather than the US dollar bet on the US dollar.

"What these institutions are most concerned about is whether the central bank will cut interest rates by more than 50 basis points in the year, because this means that they may lose money in RMB yen trading." He speaks frankly.

The massive withdrawal of these arbitrage funds followed with a comeback.

After all, when the offshore RMB fell below 6.30, the RMB exchange rate against the US dollar and the offshore RMB exchange rate in the domestic onshore market still had about 200 basis points spread, which stimulated a large number of enterprises to purchase large quantities of foreign exchange in the domestic market (buying US dollars to sell renminbi), and then sold the RMB to the NDF market in Hongkong to buy the US dollar, so as to gain the spread price.

In the view of the foreign exchange trader, the withdrawal of arbitrage capital will continue for some time.

"At present, many asset management institutions are forming a consensus that the RMB will devalue to some extent by reducing interest rates. Export industry The recovery was supported. " He thought.

　　 Domestic liquidity remains to be solved

Reporters learned that, compared to the central bank's interest rate cut cycle will trigger much arbitrage capital withdrawal volume, the same international investment institutions are currently the most talked about topic.

A Singaporean hedge fund manager thinks that the overseas capital that has inflow into China to take advantage of the unilateral appreciation of the RMB in the past few years may be as high as 100 billion US dollars. With the dual attack of the central bank's interest rate cut and the continued depreciation of the RMB, he estimates that about 20% arbitrage funds will be withdrawn. He also expects the RMB exchange rate to drop all the way to 6.4.

He believes that "a lot of hot money is actually leveraged financing from international banks, and the risk of investment is high, so they are particularly sensitive to changes in the central bank's monetary policy. Once there is a stir, they will quickly withdraw profits and wait for a calm and comeback."

To some extent, the liquidity of domestic financial market has shrunk.

Data show that in January this year, the foreign exchange balance of all financial institutions in China was 29 trillion and 300 billion 785 million yuan, a decrease of 108 billion 261 million yuan compared with the previous month, which has been reduced for two consecutive months.

In addition to the capital outflow effect, another important reason is that some trading companies are more willing to hold us dollar positions to deal with the risk of RMB devaluation. Another domestic bank source said. However, as one of the important ways for the central bank to provide liquidity to the domestic financial market, the continued decrease in foreign exchange holdings may bring a lot of pressure to domestic capital flows.

According to the central bank's recent financial institutions, the RMB credit income and expenditure account shows that although the national fiscal deposit balance was 4 trillion and 229 billion 662 million yuan in January, the annulus ratio increased by 663 billion 214 million yuan, but in the same month, domestic liquidity was still reduced by 771 billion 475 million yuan.

Xie Yaxuan, chief macroeconomic analyst at China Merchants Securities, said that the continued negative growth of foreign exchange will force the central bank to consider lowering the deposit reserve ratio, easing domestic financial liquidity and supporting the recovery of the real economy.

The latest report of the Bank of communications Financial Research Center shows that since the benchmark interest rate for one-year lending and lending has been close to the lowest level in ten years after the interest rate cut, there is little room for the central bank to cut interest rates further. However, in the case of low foreign exchange earnings and high capital outflow pressure, there will be a 1-2 reduction in the deposit reserve ratio.