Hedging Exchange Rate Risk in Light of Global Trade Friction

北大汇丰金融研究院 2021-01-21

Editor's Note
The year 2018 drew to a close with some significant concerns about the state of the global economy, primarily the fallout related to US-China trade friction. HKEX’s Chief China Economist’s Office has just published a report looking at the impact of the US-China trade war on global exchange rate markets and how exchange-traded offshore RMB Futures with multiple currency pairs can serve as effective hedging tools to meet the risk management needs of RMB assets.

Author: Chief China Economist's Office, Hong Kong Exchanges and Clearing Limited

The year 2018 drew to a close with some significant concerns about the state of the global economy, primarily the fallout related to US-China trade friction. HKEX’s Chief China Economist’s Office has just published a report looking at the impact of the US-China trade war on global exchange rate markets and how exchange-traded offshore RMB Futures with multiple currency pairs can serve as effective hedging tools to meet the risk management needs of RMB assets.

A strong US dollar and escalating trade tensions in 2018 set off capital outflows from some emerging markets and substantial movements in their currencies’ exchange rates. The RMB to USD exchange rate was less volatile compared to the currencies of other emerging markets, but is showing signs that it’s increasingly affected by the US-China trade dispute. This is resulting in greater volatility. There’s no doubt that, in the short term, trade friction and planned US interest rate hikes will have an impact on the RMB exchange rate, but in the medium term it will be supported by stable economic fundamentals underpinned by China’s supply-side structural reform and its robust monetary policies.

Given the trade friction and reform of the RMB exchange rate pricing mechanism, China’s balance of payments is being adjusted accordingly. The current account surplus may gradually narrow, leading to changes in China’s monetary policies and exchange rate movements.

This creates a greater need for risk management against RMB exchange rate fluctuations.

Turnover volumes in USD/CNH Futures and Options on the Hong Kong market have surged to historic highs so far in 2019. Investors are seeing the value of exchange-traded RMB futures and options as hedging tools with high liquidity and transparency. Given current market demand, they are more suitable products than over-the-counter (OTC) currency derivatives to meet the need to hedge currency risks with capital efficiency. In response to investor demand, currency futures with multiple currency pairs are available in the Hong Kong market for hedging against the impact of different economies on the RMB exchange rate. Products with a wide range of tenors and calendar spreads are also available to meet the demand for risk management.

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