Market uncertainty tied to the ongoing U.S.-China trade war has spurred more transactions than ever before between the American dollar and the Chinese yuan in recent months.
Much of that volume comes as businesses and investors with exposure to the Chinese market are looking to hedge their foreign exchange risk. Many of them are looking to buy into the strengthening dollar, and that's stoked speculation that Chinese authorities are intervening in the market to defend their currency, boosting trading volumes to new highs in the process.
On Tuesday, currency traders told Reuters major state-owned banks were selling dollars to defend the Chinese yuan, as the greenback climbed to a 16-month peak against a basket for currencies.
"Nobody knows how the trade war will end. There's a lot of fear and panic in the financial market and worries about trade"-Eugene Zhu, CEO, Asia Pacific Exchange
Most trading between the two currencies takes place on the spot market, where dollars and yuan change hands as soon as a deal is done. That sort of market has seen volumes surge this year for the currency pair. But futures trading — where the transaction is agreed to take place at a later date at a certain price — is also increasingly catching dollar-yuan traders' interests, according to Benjamin Lu, an investment analyst with Singapore brokerage Phillip Futures.
"The growth in interest in the currency futures is a gradual one, but there is increasing awareness about such risks," Lu told CNBC.
He cited commodity traders as some of those who are concerned about exposure to the U.S-China tariff battle and are consequently looking for various ways to hedge the risk. Proprietary traders also see opportunities for arbitrage between different products as the yuan faces volatility against the dollar, he added.
Within China's mainland borders, the yuan's price against other currencies is tightly controlled by the People's Bank of China, while the so-called offshore yuan represents the currency's value in markets beyond Beijing's control. Both measures of the yuan have declined against the dollar recently as China's economy faces headwinds from Beijing's trade war with Washington, and as the greenback strengthens on the back of robust U.S. growth.
So far in 2018, the dollar has risen about 7 percent against the onshore Chinese yuan.
Against that backdrop, the Hong Kong Exchange and the Singapore Exchange — two main centers for dollar-yuan currency futures — have both reported record trading volumes in the dollar-offshore yuan pair this year.
On the Hong Kong exchange, single-day trading volumes between the offshore yuan and the dollar hit all-time highs on July 3 and July 4.
At the Singapore Exchange, August's dollar-offshore yuan futures trading posted a dramatic rise in volume, surging over 250 percent from a year ago.
Despite consecutive month-over-month drops in September and October trading volumes, those months still saw many more transactions for the futures contracts than their year-ago periods, the Singapore Exchange said.
Interest in the pair has varied from day to day.
On Oct. 24, for instance, trading volume in China's onshore yuan also spiked to a new high on the spot market, Reuters reported. That day, $66.3 billion changed hands in the dollar-onshore yuan pair — the highest amount since data became available in May 2013. The volume dropped to $31.3 billion the next day.
A New Entrant
Such ups-and-downs in the foreign exchange market have prompted a Singapore-based privately backed Chinese exchange to launch a new dollar-offshore yuan futures contract.
"Nobody knows how the trade war will end. There's a lot of fear and panic in the financial market and worries about trade," said Eugene Zhu, CEO of the Chinese-backed Asia Pacific Exchange.
Launching the contract at this time was an opportunistic move, Zhu acknowledged.
"The more the panic in the market, the more there is the need for such a product," Zhu said, adding that the new contract would encourage traders and investors to hold onto the floundering Chinese yuan.
Indeed, Chinese exporters increasingly favor holding dollars and paying down their foreign exchange loans, Sue Trinh, head of Asia foreign exchange strategy at RBC Capital Markets, wrote in a recent note.
Not a 'Currency Manipulator'
A new product offering new opportunities and promoting active trading in the currency pair on a free and open market will also encourage transparency, Zhu said, adding that will mean China is less at risk of being called a "currency manipulator."
Even though the Asia Pacific Exchange is privately held, it does not shy away from promoting China's national agenda. That includes helping China internationalize the yuan and contributing to the Belt and Road Initiative — a multi-continent investment regime meant to further Beijing's ambitions.
The exchange said it hopes to encourage trading in its new currency derivatives product through the design of the weekly contract available in a smaller size that will help nimble hedging during times of market volatility, Zhu said.
The yuan's weakness is a political hot potato for world's second-largest economy amid its trade dispute with Washington.
U.S. President Donald Trump often accuses China of keeping its currency weak so that its exports will be cheaper and therefore more competitive.
China has been criticized for letting its currency fall, but strategists say the country actually has worked to prop the currency up since it got close to the key level of 7 yuan per dollar. The leadership in Beijing has tried to stem capital outflows, which typically accelerate when its currency weakens.
China's central bank sets a daily exchange rate for the yuan based on recent prices and allows trading against the dollar in a band that could be as much as 2 percent above or below that level.
The dollar-yuan pair is currently trading around 6.95 yuan per dollar. Analysts say the Chinese central bank is trying to keep the currency pair from breaching the psychologically important level of 7 yuan per dollar, ahead of a highly-anticipated meeting between Trump and Chinese President Xi Jinping at the G-20 in Buenos Aires, Argentina later this month.
Recently, the Treasury Department refrained from calling China a "currency manipulator," a designation that's been threatened by multiple U.S. administrations but not actually applied since 1994.
As speculation abounds that Beijing is propping up its currency, "it remains to be seen how aggressively China can defend the (onshore and offshore yuan) through direct (foreign exchange) intervention before stoking concerns about reserve adequacy given the constraints of a huge debt bubble and slowing economic growth," Trinh wrote. "In contrast to 2015/16, there is now more risk from foreign investor portfolio investment and FDI (foreign direct investment) taking flight or drying up."