Exciting Developments in Chinese Yuan FX Policy

Last week exciting murmurings started to hit the airwaves via Reuters and CNBC regarding a change in Chinese authorities FX policy. These rumours were confirmed on Thursday when the China Foreign Exchange Trade System (CFETS) announced that from Monday the 28 November 2011 they would introduce the following currency pairings: CAD/CNY and AUD:CNY.

Why these pairings you ask? Well….

Canada is a major trading partner to China and is an important economy in its own right as well as a member of the G7 so is seen as a step along the path of creating pairings with all G7 member nations.

While Australia supplies a significant proportion of China’s imported commodities and this would be the primary motivation for creating the AUD:CNY pairing.

This decision is part of an ongoing strategy by Chinese authorities to increase the use of the Chinese Yuan (CNY) and to also reduce their reliance on the USD.

As the Australian Financial Review (AFR) reported: “Previously, those wishing to buy yuan with the Aussie were forced to trade through the USD spot price, adding a layer of cost and risk.”

Aussie miners have showed enthusiasm for the change as it makes there hedge books less complicated. There could also be ramifications for the currencies which major commodities are traded in. For example at the moment iron ore is priced in USD, however these new pairings opens up the opportunity for pricing in CNY.

Likewise Chinese importers are enthusiastic – just as they were last year when the Yuan-Rubble pairing was made available- as it reduces importers exposure and risk to USD. As such it could even have an effect on USD trading volumes as Chinese importers will no longer need to undertake the extra FX step transaction.

Of course here at FX Strategy we strive to keep you up-to-date with the latest FX developments around the world and to provide you with access to the best platforms on which to trade. So if and when these pairing become available to trade you can be sure we’ll be here to let you know - so stay tuned for more details!