The Federal Reserve releases signals to disturb the foreign exchange market, how do import and export enterprises operate to avoid risk?


“The number of importers hedging the risk of falling yuan through currency hedging has increased significantly these days after the Fed released a shrinking balance sheet signal last Thursday.”A joint-stock bank told the head of the public business department. Flat cable connector, euro connectors and triangle reflector should be noted.

In the past, these importers would directly bet down on the RMB exchange rate, but now they choose to buy foreign exchange —— with a forward swap price of 6.6-6.7. If the RMB exchange rate falls below 6.7, they can still buy US dollars at 6.7 and reduce foreign exchange expenditure accordingly.

It is understood that in addition to increasing the foreign exchange hedging operation to hedge the risk of RMB exchange rate decline, many import enterprises also step by step to increase foreign exchange deposits to deal with the risk of RMB exchange rate decline.

A manufacturing company in jiangsu and jiangsu region chief financial officer, there were two foreign exchange payments to purchase raw materials, but this week the company temporarily stopped the exchange operation, because they worry about the future Fed will lead to the RMB exchange rate decline and foreign exchange costs, would rather retain the foreign exchange in the fourth quarter, reduce the potential loss of foreign exchange.

In the view of the above director of the public business department of joint-stock banks, this shows that more and more enterprises have increasingly mature judgments of foreign exchange trading and exchange rate expectations, and the capital arrangements of local and foreign currencies also tend to be rational, and no longer form a particularly strong unilateral rise and depreciation expectations due to the Federal Reserve’s balance sheet reduction and other events.

It is worth noting that more and more overseas investment institutions are also quietly increasing the exchange rate risk hedging operations.
A Hong Kong bank said most overseas investors are buying RMB bonds while betting on a volatile currency option hedging portfolio to hedge the risk of falling currency decline, a foreign exchange trader said.

“In fact, this is also an unwritten practice of the Foreign Exchange Marketing Department.”He pointed out that currency risk hedging in overseas capital will be lower when the currency stabilizes or tends to rise, while they will turn up significantly.

“Once the RMB exchange rate tends to stabilize or return to its appreciation trajectory, most overseas investment institutions will reduce their currency risk hedging operations.At present, mainstream overseas investment institutions still believe that the Fed’s balance sheet reduction this year may not pose a greater downward pressure on the RMB exchange rate.After all, the sustained growth of China’s economic fundamentals and the high balance of payments surplus provide strong support for the two-way fluctuations of the RMB exchange rate in the balanced exchange rate.”The chief representative of a large European asset management agency admitted.

As of 20:00 on August 24, the RMB exchange rate in the domestic onshore market (CNY) hovered at 6.4773, and successfully recovered the 6.5 integer mark, highlighting the “resilience” of the RMB exchange rate.
New exchange-rate hedging operations for import companies

“After the yuan fell below 6.5 against the dollar on Friday, their enthusiasm for foreign exchange hedging increased significantly.”The aforementioned joint-stock bank told the head of the public business department.

Many importers had planned to wait until the end of August to confirm the foreign-exchange hedging package in the fourth quarter, but as the Fed’s table reduction signal increasingly significantly led to the rapid rise of the dollar during the year, they can no longer “sit still”.

It is reported that although most importers set the foreign exchange swap execution price between 6.6 and 6.7, their foreign exchange hedging positions quite match the actual business foreign currency demand, unlike the previous bearish RMB hedging positions far exceed their actual business demand.

“Behind this, many import enterprises have learned from the previous foreign exchange hedging losses, —— thought to see the exchange rate trend and overexpand the scale of hedging for speculative bets.”The joint-stock bank told the head of the public business department.

He found that although the cover position risk is effectively controlled, but many import enterprises still focus on the assessment of foreign exchange cover profits, no foreign exchange cover and reduce enterprise actual operating costs (including reduce raw materials import procurement exchange costs, etc.), leading to its foreign exchange cover measures still have larger bet exchange rate fall speculative tendency.

At present, his joint-stock bank is increasing communication with these import enterprises, recommend them to introduce foreign exchange risk reversal portfolio options —— as long as the future RMB exchange rate quotation in foreign exchange risk reverse portfolio option exercise price, enterprises do not need to pay any fees, and can avoid the RMB exchange rate reversal rise caused by the existing foreign exchange swap transaction loss risk.

It is understood that many importers are increasing foreign exchange deposits, in order to deal with the risk caused by the Fed reducing the RMB exchange rate decline this year.

“The reason is that many companies have tasted the benefits from it.”A financial markets trader at a large state-owned bank pointed out.In the first half of this year, the balance of domestic foreign exchange deposits of enterprises and other market entities increased sharply by US $65.8 billion compared with the end of 2020, making many import enterprises successfully avoid the two rounds of RMB exchange rate decline in the first half of this year, and effectively reduce the loss of foreign exchange purchase.
Overseas investment institutions have resumed exchange-rate risk-hedging operations

In the face of the downward risk caused by the Fed’s balance sheet reduction this year, many overseas investment institutions have resumed exchange rate risk hedging operations.

“During the period of relatively stable exchange rate fluctuations or the tendency to appreciate in the RMB, we did relatively no exchange rate risk hedging operations when adding additional RMB bonds.”A large Wall Street macroeconomic hedge fund manager revealed that now they are planning to increase an exchange rate risk hedge to the 50% RMB bond portfolio.

The hedge fund’s reason is that the yuan could swallow the country’s spreads if sharply lower by the Fed.

Data show that as of 20:00 Tuesday, the difference between the 10-year Chinese Treasury yield and the US Treasury yield) reached 162 basis points, but many overseas investment institutions are worried that if the Fed reduced the RMB exchange rate to between 6.55 and 6.6, this spread yield will be “swallowed up” by the depreciation of the exchange rate.

The Hong Kong bank foreign exchange traders revealed that since Friday, many overseas investment institutions in add RMB bonds at the same time took the exchange rate risk hedging operation —— compared to domestic import enterprises like to use swap lock, overseas investment institutions prefer to bet on the RMB exchange rate volatility hedging options portfolio hedging exchange rate fall risk.

Behind this is the widespread belief by overseas investment institutions that the Fed’s balance sheet within the year may fluctuate the RMB exchange rate in the short term, but may not have a greater impact on the balanced exchange rate valuation.

“The RMB is the second-best emerging market currency this year, thanks to continued growth in China’s economic fundamentals.”Morgan Stanley strategy analyst Matthew Hornbach released the latest report noted.In addition, China’s relatively high balance of payments surplus also puts the yuan under much lower downward pressure than in other emerging-market countries.

Matthew Hornbach believes that the Fed’s table sheet contraction has left the yuan sharply lower this year.

“In fact, we increase the RMB risk hedging is more like a preventive measure.Once the RMB exchange rate restabilizes or tends to rebound, we will quickly cut back on the exchange rate risk hedging operations.”The above big Wall Street macro-economy hedge fund manager pointed out.After all, exchange rate risk hedging operations cost the actual yield of the entire RMB bond portfolio an additional 40-50.0 basis points, making their weaker performance than other hedge fund peers and not conducive to their future fundraising and expansion scale of asset management.

 

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