JPY:CNY

For a major piece of news, it passed relatively un-noticed in the world of FX – most likely due to the timing of its release. Over the Christmas - New Year period an important currency deal was announced between Japan and China which in the long term will most likely have significant consequences for FX trade and in the near term has led to a 1.1% bounce in the JPY:CNY pairing.

The news was an historic agreement reached between the Japanese and Chinese governments to encourage firms in their respective nations to conduct as much trade as possible in JPY and CNY rather than in USD. The official statement explained that better market co-operation between the two countries would benefit “the ease of trade and investments between the two countries” and strengthen “the region’s ability to protect against risks and deal with challenges”.

As the Australian Financial Review reported in relation to this deal, China is Japan’s biggest trading partner with approximately US$350B in trade conducted annually. Like much of the world, and as regular FX Strategy readers and only too aware, many governments are trying to shield themselves from any fall out from having large reserves of EUR and USD. This agreement is one proactive way in which Japan and China are attempting to protect themselves.

Deals of this magnitude have broader implications. While commodity prices for now will remain quoted in USD as Australian resource companies are beginning to find out, the Chinese are seeking contracts written in CNY. These contracts appear to be quite small at this stage but as China increases its position and influence on the world stage over the coming decade, one can only expect this sort of CNY denominated contract to increase.

As a further sign of things to come, within a week of the JPY:CNY deal, Japan had signed a similar deal with India to encourage the direct FX trade between INR:JPY. [note: India’s currency in the Rupee (INR)]

FX strategy requires traders to remain abreast of a huge range of global events and that is part of the fun and challenge of FX trading. At FX Strategy HQ we view the “China Theme” as critical to our long term FX strategy and will continue to keep readers up to speed with developments in this area.