Talking points on this podcast:
- What is a currency war and what forex implications does it have?
- What’s the difference between CNY and CNH?
- Exploring the outlook for the US Dollar against the Chinese Yuan
This time on Trading Global Markets Decoded, our host Martin Essex is joined by Rupert Osborne, US Chief Executive of DailyFX parent company IG. In this edition, we cover the threat of currency war, delve into the difference between CNY and CNH, and discuss the prospects for USD, as well as covering the Chinese Yuan forecast against the unfolding fundamental backdrop. You can listen to this podcast by clicking on the YouTube link above or by using one of the alternative platforms listed below.
What is a currency war?
A currency war is normally understood as antagonistic trade involving countries between trading blocs, where one side or both seek to use their currency as a weapon to further their own political or economic agenda. Often the case arises where an exporting economy seeks to lower the value of its currency and protect its domestic margins and the value of its exports.
Rupert kicks off the podcast with an example of this. “During the financial crisis in 2008/09 there were very real concerns that countries would use devaluation of their currencies to gain an advantage over other parts of the world,” he says. “We saw in the UK the value of the Pound dropping by 20-25% over that period and that devaluation supported the UK economy quite significantly.”
Meanwhile over the channel in Europe, a multinational bloc of countries using one currency meant countries that seemingly would benefit from devaluing their currency like Greece, Italy and Spain, were unable to as they were locked into the European single currency.
Rupert also discusses the more recent accusations from Washington of China being a currency manipulator. “[The US believes] that [China] has sought to hold the value of their currency down for their exporters to gain advantage over US companies.”
What’s the difference between CNY and CNH?
The difference between CNY and CNH is described by Rupert as a unique setup in the currency world today, where a single currency has two markets where it trades. CNY is the onshore Chinese yuan exchange rate, and CNH is the offshore, with the ‘H’ meaning Hong Kong (Chinese yuan that can be delivered in Hong Kong).
“The FX market, like most other financial markets, relies on physical settlements of currencies,” Rupert explains. “In countries where there are restrictions on capital movements in and out of the country, like China or India, there may be difficulties acquiring or settling the currency outside of that country.
“So there are two markets, an onshore CNY, which is heavily controlled by the People’s Bank of China, and the offshore CNH, which is available to investors and the rest of the world.” IG, for instance, offers the USD/CNH pair to trade but doesn’t offer the USD/CNY.
What’s the relationship between the CNY and CNH rates? “They’re very closely linked. During periods of stress the offshore rate tends to move further one way or the other because it’s not as tightly controlled; however if you plotted a chart of the two rates, you would see they track each other pretty closely.
“So because international investors only have access to the CNH as a rule, that is the rate you’ll see talked about the most often.”
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