CNH: Chinese Currency Could Return to the 6.3-6.9 Level
CME: USD/Offshore RMB Futures ( 
CNH1!)
Last week, I discussed how China’s huge stimulus package, coupled with the Fed’s supersized rate cut, could improve global energy demand and lift crude oil higher.
As soon as the stimulus was announced, China’s stock market staged a huge rally. The Shanghai Stock Exchange (SSE) index moved from below 2,800 on September 24th to close at 3,336.5 on September 30th, up 19% in a week. One-month return for the SSE and notable Chinese stocks are listed here:
• SSE: +17.5%
• Yonghui Supermarkets: +59.9%
• JD: +51.3%
• BABA: +32.5%
• BIDU: +25.5%
China's stock market is closed on October 1st-7th for observation of the National Day holiday. Would the China rally continue when the market resumes trading on Tuesday?
Goldman Sachs just released a research note, saying: Unless China does QE now, the current market rally will crash and burn, and the economy will be a crater. If China does do QE, oil will soar, and gold and bitcoin will be orders of magnitude higher.
While this is presented as two alternative paths, there is only one way to go, in all practical purpose. After going all out last month with unprecedented fiscal stimulus, the Chinese government could not afford to see the stock market and the housing market to tank again. It really needs to finish the job by injecting fiscal stimulus into the economy. Now that the market sensation has already turned positive, government spending would trigger consumer spending as well as investment from the private sector. Such a multiplier effect could lift the Chinese economy higher.
Everything looks bright, with one small problem: China-listed stocks are off-limited to most foreign investors due to financial regulations and the foreign currency control regime.
China’s currency could strengthen as its economy recovers
I hold the view that the China’s currency could appreciate as its economy improves. Outside of China, investors could invest in USD/RMB futures to hitch the economic hike.
To start the discussion, let’s first make some clarification to the confusing terms in the FX market. The USD/RMB exchange rate is quoted as the number of RMB per dollar. The current USD/RMB rate is 7.09, meaning each dollar could exchange for 7.09 RMB.
When the RMB appreciates against the dollar, the price quote would get lower, not higher. For example, the rate 6.50 means you now need 6.50 RMB to get one USD dollar. In RMB terms, this is 0.59 Yuan less than the current USD/RMB rate 7.09. In this scenario, the RMB gains value relative to the dollar.
While the RMB appreciation equates to the dollar depreciation, in charts, the lines representing USD/RMB and the dollar index should move in the same direction.
• For dollar index, the line moving up means dollar gaining value.
• For the USD/RMB, the line moving up means the dollar appreciating against the RMB.
• These two things usually occur at the same time.
In 2023, as China’s economy did not rebound after the end of the pandemic closedown, the RMB depreciated more than 10% against the dollar, sending the rate from 6.69 to 7.37.
In 2024, the two lines diverged due to different economic forces.
• Dollar index moves down with the market expectation of the Fed cutting rates, reducing the interest earned from holding dollar asset.
• The USD/RMB quote moves up because of the slowdown in China’s economy.
In my opinion, the two lines will converge again, both moving down in Q4. Dollar index will get lower as the Fed continues rate cuts. The USD/RMB quote will also go lower, as improvement in China’s economy would strengthen the country’s currency.
For someone with a bullish view of RMB, he could establish a short position in CME USD/Offshore RMB Futures (
CNH). Remember, shorting means the expectation of the quote to go lower, which actually means RMB appreciating against the dollar.
The contract has a notional value of $100,000. At Friday closing price of 7.061, each December contract (CNHZ4) is worth RMB 706,100. CME Group requires an initial margin of RMB 14,000 for each CNH contract, long or short, at the time of writing.
Hypothetically, if CNH bounced back to 6.70, its previous high in January 2023, the quote difference of 361 pips (=7061-6700) would produce a gain of RMB 36,100 (=0.361x100,000) for a short position.
The risk of shorting the CNH is that the Chinese government did not follow through with a fiscal stimulus, and the market rally is short lived.
Happy Trading.
Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme/
CNH1!)Last week, I discussed how China’s huge stimulus package, coupled with the Fed’s supersized rate cut, could improve global energy demand and lift crude oil higher.
As soon as the stimulus was announced, China’s stock market staged a huge rally. The Shanghai Stock Exchange (SSE) index moved from below 2,800 on September 24th to close at 3,336.5 on September 30th, up 19% in a week. One-month return for the SSE and notable Chinese stocks are listed here:
• SSE: +17.5%
• Yonghui Supermarkets: +59.9%
• JD: +51.3%
• BABA: +32.5%
• BIDU: +25.5%
China's stock market is closed on October 1st-7th for observation of the National Day holiday. Would the China rally continue when the market resumes trading on Tuesday?
Goldman Sachs just released a research note, saying: Unless China does QE now, the current market rally will crash and burn, and the economy will be a crater. If China does do QE, oil will soar, and gold and bitcoin will be orders of magnitude higher.
While this is presented as two alternative paths, there is only one way to go, in all practical purpose. After going all out last month with unprecedented fiscal stimulus, the Chinese government could not afford to see the stock market and the housing market to tank again. It really needs to finish the job by injecting fiscal stimulus into the economy. Now that the market sensation has already turned positive, government spending would trigger consumer spending as well as investment from the private sector. Such a multiplier effect could lift the Chinese economy higher.
Everything looks bright, with one small problem: China-listed stocks are off-limited to most foreign investors due to financial regulations and the foreign currency control regime.
China’s currency could strengthen as its economy recovers
I hold the view that the China’s currency could appreciate as its economy improves. Outside of China, investors could invest in USD/RMB futures to hitch the economic hike.
To start the discussion, let’s first make some clarification to the confusing terms in the FX market. The USD/RMB exchange rate is quoted as the number of RMB per dollar. The current USD/RMB rate is 7.09, meaning each dollar could exchange for 7.09 RMB.
When the RMB appreciates against the dollar, the price quote would get lower, not higher. For example, the rate 6.50 means you now need 6.50 RMB to get one USD dollar. In RMB terms, this is 0.59 Yuan less than the current USD/RMB rate 7.09. In this scenario, the RMB gains value relative to the dollar.
While the RMB appreciation equates to the dollar depreciation, in charts, the lines representing USD/RMB and the dollar index should move in the same direction.
• For dollar index, the line moving up means dollar gaining value.
• For the USD/RMB, the line moving up means the dollar appreciating against the RMB.
• These two things usually occur at the same time.
In 2023, as China’s economy did not rebound after the end of the pandemic closedown, the RMB depreciated more than 10% against the dollar, sending the rate from 6.69 to 7.37.
In 2024, the two lines diverged due to different economic forces.
• Dollar index moves down with the market expectation of the Fed cutting rates, reducing the interest earned from holding dollar asset.
• The USD/RMB quote moves up because of the slowdown in China’s economy.
In my opinion, the two lines will converge again, both moving down in Q4. Dollar index will get lower as the Fed continues rate cuts. The USD/RMB quote will also go lower, as improvement in China’s economy would strengthen the country’s currency.
For someone with a bullish view of RMB, he could establish a short position in CME USD/Offshore RMB Futures (
CNH). Remember, shorting means the expectation of the quote to go lower, which actually means RMB appreciating against the dollar.The contract has a notional value of $100,000. At Friday closing price of 7.061, each December contract (CNHZ4) is worth RMB 706,100. CME Group requires an initial margin of RMB 14,000 for each CNH contract, long or short, at the time of writing.
Hypothetically, if CNH bounced back to 6.70, its previous high in January 2023, the quote difference of 361 pips (=7061-6700) would produce a gain of RMB 36,100 (=0.361x100,000) for a short position.
The risk of shorting the CNH is that the Chinese government did not follow through with a fiscal stimulus, and the market rally is short lived.
Happy Trading.
Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme/
Jim W. Huang, CFA
jimwenhuang@gmail.com
jimwenhuang@gmail.com
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