This Lunar New Year should be different for China’s Renminbi (RMB), with Deutsche Bank’s FX strategists predicting the currency will remain strong (perhaps like the Ox) against the US dollar through February.

RMB FX strategist Perry Kojodjojo commented: “RMB this February is likely to go against a pre-COVID seasonality trend, which typically sees the RMB rally in January but pullback in February. This could reflect institutions drawing down dollar deposits to meet liquidity demand ahead of the Lunar new year while February reverses due to outbound tourism. So far this year the RMB has continued to strengthen, backed by China’s V-shaped recovery and policy wind back."

The most recent RMB Tracker data from SWIFT released last month showed that in December 2020, the RMB has retained its position as the fifth most active currency for global payments by value, with a share of 1.88%. Overall, RMB payments value increased by 5.72% compared to November 2020. As a global currency in trade finance market, based on the value of live and delivered MT 400 and MT 700 messages exchanged on SWIFT, the RMB was the third most active currency in December 2020, with a 2.05% share.

Currency appreciation

Deutsche Bank strategists forecast the RMB, also known as the Chinese Yuan (CNY), to hit 6.2 by year end, appreciating against the US dollar.

Late in 2020, when the RMB was performing like a safe haven currency, Deutsche Bank recorded significant trading volume increases in the RMB with EM currency crosses.   

“Our unique RMB hub and spoke setup is enabling more and more clients to trade onshore CNY from offshore," commented Jerry Li, head of Global Markets Greater China at Deutsche Bank. "In Q4 2020, the cross border RMB volumes we facilitated for corporate clients rose 70%, quarter-on-quarter. During Covid volatility last April, we were one of the few foreign banks that continued to provide liquidity and pricing, when liquidity was only 20%-40% compared to normal markets.” 

RMB gone global

China and the RMB’s internationalisation has been a long-term strategic focus for Deutsche Bank’s FIC business.

“Standing apart from competitors, we created a dedicated RMB team under Global Emerging Markets," said Sameen Farooqui, head of Global Emerging Markets at Deutsche Bank. "This global team of traders and sales people - in Shanghai, Singapore, Hong Kong, New York and London - enables 24/5 follow-the-sun RMB trading and coverage. In addition to quoting RMB in these hubs, we now quote RMB crosses in the country of client domicile using our network of onshore ‘pipes’. For example, we quote RMB/Ringgit in Malaysia." 

Invested in RMB

The bank has expanded its global CNY sales and trading through the years, and this accelerated in 2019 when the PBOC approved use of Deutsche Bank’s Hong Kong branch as the central hub to offer cross border RMB spot and FX derivatives through any of the bank’s branches worldwide.

This was a first-of-its kind solution allowing clients of any Deutsche Bank branch in the world to trade onshore USD/CNY spot and hedging solutions.

“Last May we executed the first onshore Chinese Yuan electronic deal via our e-trading Autobahn platform, representing the next step towards 24/5 CNY-electronic streaming capability,” Li added. 

Deutsche Bank’s hub and spoke model makes China FX and hedge solutions more accessible for Deutsche Bank’s corporate clients, particularly those in Europe and the US, Latin America, Africa and the Middle East. 

RMB options growth

In the past year, Deutsche Bank client demand for CNY options nearly doubled in Asia, and the bank also saw significant growth in demand from clients across Europe and North America. This momentum has continued unabated into 2021 with another strong month of CNY option activity during the month of January, which looks set to continue as the investor interest in China markets more broadly accelerates.

The huge leap in interest for CNY options in 2019 is attributed to China’s bond inclusion in the Bloomberg Global Aggregate bond indices, which represented the single largest re-balancing in this index’s history.

Deutsche Bank strategists estimate offshore investors held about 2.9% of China’s domestic bond market at the end of 2020, up from 2.3% in 2019.