Foreign Exchange Market: Valuation Game Leads To Arbitrage

In recent years, the central bank has been adjusting the middle price, which seems to be in a step to reverse the trend of the sharp decline of the RMB, and to tolerate the slow decline of the RMB following the market.

In particular, when the Yuan's spot exchange rate closed for the first time last Monday, the central bank raised the central parity of the RMB exchange rate on the second day, which seems to be aimed at stabilizing the fluctuation range of the RMB exchange rate.

Some economists point out that the central bank's move is to convey some policy signals to the market: it is establishing a managed RMB floating exchange rate system based on market supply and demand.

Specifically, it is the interval management of RMB exchange rate fluctuations.

Many foreign exchange traders believe that the central bank set the scope of the RMB exchange rate volatility management category, may be in the RMB against the dollar exchange rate 6.0-6.3 wide fluctuations.

In this way, it can depreciate the dollar exchange rate timely and ensure the steady recovery of export industry. Secondly, it can maintain a moderate and slow appreciation of the non US currencies such as the euro and yen, and create favorable environment for the internationalization of RMB.

However, some

They do not agree with this view. They are more inclined to see a rapid devaluation of the renminbi.

An American hedge fund manager believes that the nominal and effective exchange rate of the renminbi has appreciated by 40.5% and 51% respectively since the exchange rate reform in 2005.

Now, with the strong appreciation of the US dollar and the slowdown in China's economy, capital withdrawal may not be ruled out. The renminbi will be temporarily short of about 10%.

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"Over the past few years, the unilateral appreciation of the renminbi has accumulated huge offshore arbitrage funds.

Now these funds see the two-way fluctuations of the renminbi, resulting in a substantial contraction in earnings, and naturally consider changing the door.

He further pointed out that, as far as he knows, there are many yen to RMB.

Evacuation is beginning.

In the past, they could enjoy 4%-5% annualized risk-free interest spread every year by borrowing yen into Renminbi. However, with the depreciation of RMB against the US dollar by about 3.1% in the past year, they found that the shift of arbitrage funds to the US dollar might get more substantial gains than the renminbi, and they began to withdraw from Renminbi assets.

In the view of the above foreign exchange traders, it is precisely the difference between overseas capital and the central bank's future trend toward the RMB exchange rate, which leads to the quotation of offshore RMB exchange rate often lower than the domestic market, thus triggering the surge of arbitrage.

However, such arbitrage may not last long because foreign capital is also afraid that the central bank will adopt exchange rate intervention measures, thereby hurting their own spreads.

He pointed out that once the RMB exchange rate has fallen below the lowest level of 6.2676 in 2014, it may make these offshore capital more pessimistic towards the future trend of RMB exchange rate and further speed up the withdrawal of capital, which will continue to lead to the widening of the foreign exchange gap within the renminbi and the emergence of more arbitrage markets.

At the close of February 2nd, the US dollar closed 6.2597 against the yuan, only a step away from its lowest level in 2014.