Home » The Federal Reserve’s signal of contraction of the balance sheet during the year disturbs the foreign exchange market: Import companies take precautions and increase hedging operations against falling exchange rates|Federal Reserve|Exchange Rate|Renminbi

The Federal Reserve’s signal of contraction of the balance sheet during the year disturbs the foreign exchange market: Import companies take precautions and increase hedging operations against falling exchange rates|Federal Reserve|Exchange Rate|Renminbi

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Original title: The Fed’s signal of contraction of the balance sheet during the year disturbs the foreign exchange market: Import companies take precautions and increase hedging operations against exchange rate declines

Facing the risk of RMB exchange rate decline caused by the Fed’s balance sheet reduction during the year, many overseas investment institutions have restarted exchange rate risk hedging operations.

“After the Federal Reserve issued a signal to reduce its balance sheet during the year last Thursday, there has been a significant increase in the number of import companies that have used foreign exchange hedging to hedge against the risk of falling RMB exchange rate.” A director of the corporate business department of a joint-stock bank told reporters.

In the past, these importing companies would directly bet on the decline of the RMB exchange rate in the foreign exchange market. Now they choose to buy the forward swaps with the execution price of 6.6-6.7 in the next 3-4 months to “lock in foreign exchange”-if the RMB exchange rate Below 6.7, they can still buy US dollars at 6.7, which will reduce their spending on foreign exchange purchases.

Reporters have learned from many sources that, in addition to increasing foreign exchange hedging operations to hedge against the risk of RMB exchange rate decline, many import companies have also stepped up their foreign exchange deposits to deal with the risk of RMB exchange rate decline.

The chief financial officer of a manufacturing company in Jiangsu and Zhejiang revealed to reporters that two foreign exchange payments were originally intended to be settled for the purchase of raw materials, but this week the company’s executives temporarily suspended the settlement operation because they feared that the Fed’s future balance sheet reduction would cause the RMB exchange rate to fall. With the increase in the cost of purchasing foreign exchange, I would rather save this foreign exchange for external payments in the fourth quarter to reduce potential losses in foreign exchange purchases.

In the opinion of the head of the public business department of the above-mentioned joint-stock bank, this shows that more and more companies have become more mature in their judgments on foreign exchange transactions and exchange rate expectations, and that domestic and foreign currency funding arrangements have become more rational, and they are no longer particularly strong due to events such as the Fed’s shrinking balance sheet. Expectations of unilateral appreciation and devaluation.

It is worth noting that more and more overseas investment institutions are quietly increasing exchange rate risk hedging operations.

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A foreign exchange trader at a Hong Kong bank revealed to reporters that since the Fed’s signal for the year’s contraction of the balance sheet last Thursday, most overseas investment institutions are buying renminbi bonds while buying foreign exchange option sets that bet on the volatility of the renminbi exchange rate. The insurance portfolio is used to hedge the risk of falling RMB exchange rate.

“In fact, this is also an unwritten operating practice of the Foreign Exchange Market Department.” He pointed out that whenever the renminbi stabilizes or tends to rise, foreign capital’s exchange rate risk hedging operations will go down; otherwise, such operations will increase significantly.

“Once the RMB exchange rate tends to stabilize or return to an appreciation trajectory, most overseas investment institutions will reduce exchange rate risk hedging operations. At present, mainstream overseas investment institutions still believe that the Fed’s balance sheet reduction during the year will not necessarily pose greater downward pressure on the RMB exchange rate. After all. , China’s economic fundamentals continue to grow and the high balance of payments surplus provides strong support for the two-way fluctuation of the RMB exchange rate in the equilibrium exchange rate.” A chief representative of the Asia-Pacific region of a large European asset management agency revealed to reporters.

As of 20 o’clock on August 24, the domestic onshore market renminbi-dollar exchange rate (CNY) was hovering at 6.4773, successfully regaining the 6.5 round mark, highlighting the “resilience” of the renminbi exchange rate.

New exchange rate hedging operations for importing companies

“After the RMB/USD exchange rate fell below 6.5 last Friday, the enthusiasm for foreign exchange hedging operations of importing companies has increased significantly,” the head of the corporate business department of the aforementioned joint-stock bank told reporters. Originally, many import companies planned to wait until the end of August to finalize the foreign exchange hedging plan for the fourth quarter. However, as the Fed’s signal of shrinking the balance sheet during the year has increasingly led to the rapid rise of the US dollar, they can no longer “stand still.”

The reporter was informed that although most importing companies set the execution price of foreign exchange swap transactions at 6.6-6.7, their foreign exchange hedging positions are quite matched with actual business foreign currency demand, unlike the previous hedging positions that were bearish on RMB. Exceed its actual business needs.

“Behind this, many import companies have learned the lessons of the previous foreign exchange hedging losses-thinking that they were optimistic about the exchange rate trend and excessively expanded the hedging scale to make speculative bets, and eventually lost their wife and broke down.” The joint-stock bank said. The head of the public business department revealed.

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He found that despite the effective control of the risk of hedging positions, many importing companies still focus on assessing the profit and loss of foreign exchange hedging and fail to link foreign exchange hedging with the reduction of the actual operating costs of the company (including the reduction of foreign exchange costs for importing raw materials, etc.) , Leading to its foreign exchange hedging measures still have a greater tendency to bet on falling exchange rates.

At present, his joint-stock bank is intensifying communication with these importing companies, recommending that they introduce foreign exchange risk reversal portfolio options-as long as the future RMB exchange rate is within the exercise price of the foreign exchange risk reversal portfolio option, the company does not need to pay any fees, and It can avoid the loss risk of existing foreign exchange swap transactions caused by the reversal of the RMB exchange rate.

Reporters have learned from many sources that many importing companies are increasing their foreign exchange deposits to deal with the risk of a fall in the RMB exchange rate caused by the Fed’s balance sheet contraction during the year.

“The reason is that many companies have already tasted the sweetness.” A trader in the financial market department of a large state-owned bank pointed out to reporters. In the first half of this year, the balance of domestic foreign exchange deposits of enterprises and other market entities surged by US$65.8 billion from the end of 2020, enabling many importing companies to successfully avoid the two rounds of RMB exchange rate declines in the first half of this year, effectively reducing losses in foreign exchange purchases.

Overseas investment institutions regain exchange rate risk hedging operations

Facing the risk of RMB exchange rate decline caused by the Fed’s balance sheet reduction during the year, many overseas investment institutions have restarted exchange rate risk hedging operations.

“Previously, during the period when the RMB exchange rate was relatively stable or tends to appreciate, we hardly did any exchange risk hedging operations when adding up RMB bonds.” A large Wall Street macroeconomic hedge fund manager told reporters that they are now planning to give 50% RMB bond investment portfolio increased exchange rate risk hedging.

The reason is that this hedge fund is worried that if the RMB exchange rate drops sharply due to the Fed’s shrinking balance sheet, it may swallow the interest rate differential gains between China and the United States.

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Data shows that as of 20 o’clock on the 24th, the spread between China and the United States (the difference between the 10-year Chinese Treasury bond yield and the U.S. Treasury bond yield) reached 162 basis points, but many overseas investment institutions are worried that if the Fed shrinks the balance sheet during the year, the RMB exchange rate Falling back to between 6.55 and 6.6, this part of the interest rate gains will be “swallowed up” by the depreciation of the exchange rate.

The above-mentioned Hong Kong bank foreign exchange dealers revealed to reporters that since last Friday, many overseas investment institutions have taken exchange rate risk hedging operations while increasing their positions in RMB bonds. Institutions prefer to use foreign exchange option hedging portfolios that bet on the increased volatility of the RMB exchange rate to hedge against the risk of exchange rate declines.

Behind this, overseas investment institutions generally believe that the Fed’s reduction of the balance sheet during the year may increase the volatility of the RMB exchange rate in the short term, but it may not have a major impact on the equilibrium valuation of the exchange rate.

“Thanks to the continued growth of China’s economic fundamentals, the renminbi is the second-best performing emerging market currency this year.” Morgan Stanley strategist Matthew Hornbach pointed out in the latest report. In addition, China’s relatively high international balance of payments surplus also puts the downward pressure on the renminbi far lower than other emerging market countries.

Matthew Hornbach believes that the Fed’s inability to shrink its balance sheet during the year will cause the RMB exchange rate to fall sharply.

“In fact, we increase the RMB exchange rate risk hedging operation, which is more like a preventive measure. Once the RMB exchange rate stabilizes or tends to rebound, we will quickly reduce the exchange rate risk hedging operation.” The hedge fund manager pointed out. After all, the exchange rate risk hedging operation has caused an additional loss of 40-50 basis points in the actual yield of the entire RMB bond portfolio, making their performance inferior to other hedge fund peers, which is not conducive to their future fundraising and expansion of asset management scale.

(Author: Chen Zhi Editor: Zhang Xing)


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