Reuters: US Dollar Report: CNH Tracker-Hong Kong exchange, CME Group ready offshore yuan futures

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CNH Tracker-Hong Kong exchange, CME Group ready offshore yuan futures Sep 13th 2012, 06:24 Thu Sep 13, 2012 2:24am EDT By Michelle Chen HONG KONG, Sept 13 (Reuters) - The Hong Kong stock exchange will launch the first exchange-traded USD/CNH currency futures settled in yuan next week, enriching the derivative products available in the fledgling market. The futures contract will cater to the increasing needs of companies and investors to hedge currency risks as the one-way appreciation trend of the yuan appears to have come to an end. The new contract, with lower counterparty risks and better transparency, will become a good supplement to the existing CNH deliverable forward (DF) and USD/CNY non-deliverable forward (NDF) markets. The yuan has slipped 0.6 percent against the U.S. dollar so far this year, catching investors off guard as many of them did not take any steps to hedge the yuan exposure. Analysts differ on which direction the Chinese currency will head next, given uncertainty over China's policies and its slowing economic growth. BofA Merrill Lynch said in a latest report that yuan appreciation has further to run over the longer run, but added that over a 3-to-6-month horizon it will see increasing flexibility, depreciation risks and volatility by extension. "Currency futures give an extra option to investors to hedge their FX exposure," said Dominic Bunning, associate FX strategist at HSBC, noting it is part of the process of internationalising the yuan and making it more similar to other global trading currencies, since major currency pairs all have the trading of FX futures. The largest U.S. exchange operator, CME Group, also announced on Thursday its plans to launch deliverable CNH futures and have them dually listed on both CME and CME Europe Ltd in the fourth quarter this year and the second quarter 2013, respectively. The USD/CNH currency futures to be launched in Hong Kong on Sept. 17 will require delivery of dollars by the seller and payment in yuan by the buyer at maturity. Contracts will be quoted in yuan per dollar and margined in yuan, with trading and settlement fees also charged in yuan. Calvin Tai, head of the trading division at exchange operator Hong Kong Exchanges and Clearing, expected the futures contracts to divert some fund flows from the NDF market which he said is only a transitional market before the yuan becomes fully convertible. However, most traders believe corporates with FX exposure will stick to the DF market, which has no margin requirements, tailor-made contract sizes and tenors. In the DF market, the settlement date is fixed according to each company's needs and thus greatly reduces the basis risk, said a trader based in Hong Kong, referring to the risk brought by the mismatch between the expiration date of hedging tools and settlement date of actual imports/exports. That said, the futures market is likely to attract players from a much broader base, including those making investments in yuan products such exchange traded funds and under qualified foreign institutional investor scheme, or even individual investors. Also, with these standardized contracts becoming available, investors may be more encouraged to take positions in both the onshore and offshore yuan market, to benefit from their relatively higher returns while manage currency risks. WEEK IN REVIEW: * Five Taiwan banks have been given permission by People's Bank of China to invest in mainland's interbank bond market, including Hong Kong branches of China Trust Commercial Bank, Bank of Taiwan, Hua Nan Bank, Fubon Bank and the offshore banking unit of Mega International Commercial Bank. * S&P Dow Jones Indices and Deutsche Bank have co-branded the latter's existing Offshore Renminbi Bond Index Tracker. J.R. Rieger, Vice President of fixed income indices at S&P Dow Jones Indices, said global demand to passively invest is something that's driving demand for the dim sum type products for higher yields and the ability to diversify portfolios. * Malaysian telecommunication company Axiata issued a 1 billion yuan ($158 million), two-year dim sum sukuk, priced at 3.75 percent. It is the second dim sum sukuk following the one issued by Khazanah Nasional last October, and was very well received with the books over 3.5 billion yuan from 82 orders. * The dim sum bond market is going through an evolution as the nature of the classical investors keeps changing from macro funds to credit-focused ones, said Vishal Goenka, Deutsche Bank's Asia head of local currency credit trading, adding that daily trading volume of dim sum bonds has dropped 30-40 percent from last year amid gloomy global financial markets. * Further widening the trading band for China's yuan is a policy option that China's central bank may adopt in the future to better reflect market forces, said Guo Jianwei, deputy director of the central bank's monetary policy department, giving no timeframe. CHART OF THE WEEK: Offshore yuan movements:LEAGUE TABLES Book runner: Proceeds (RMB mln): # of issues: 1. HSBC 30,721.6 95 2. Standard 14,814.1 52 Chartered Bank 3. Bank of China 9,860.6 13 4. BNP Paribas SA 8,318.1 30 5. Barclays 6,711.7 14 YTD synthetic RMB bond issuance: Book runner: Proceeds (RMB mln): # of issues: 1. Deutsche Bank 4,479.2 3 2. Citi 2,912.5 2 3. Bank of China 2,312.5 1 4. Bank of America 2,312.5 1 Merrill Lynch 5. HSBC 1,248.5 2 * Thomson Reuters data as of Sept 13. RECENT STORIES: CNH Tracker-Rising swap rates favor foreign issuers of dim sum bonds Taiwan-China economic ties to deepen with yuan pact More stories about the CNH market Daily onshore yuan reports Daily China money market reports Offshore yuan rate Onshore yuan rate Offshore yuan dealt Onshore yuan on CFETS Offshore yuan bonds THOMSON REUTERS SPEED GUIDES Link this Share this Digg this Email Reprints

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