Many emerging market currencies have been depreciating as currency traders flock to safe havens like the dollar. But one falling EM currency that’s really caught our attention is the offshore yuan (CNH).
There are a few key reasons why the CNH had been so popular:
- CNH trades at a premium to the onshore yuan (CNY) because it is freely convertible in Hong Kong.
- Trading regulations in the offshore market are more lax than the onshore market.
- Offshore yuan offers cheaper debt funding for corporations than the onshore yuan.
However, investors have been aggressively dumping the CNH. Now this could have a major impact on deposits which drive CNH credit through demand from banks.
A new Morgan Stanley presentation breaks down exactly what’s going on in the off-short market.
Short-term risks to the CNH include the European debt crisis, weaker demand for CNY, and expectations of a rate cut by the People's Bank of China
Falling demand for CNH could result in shrinking CNH deposits, which happened during the financial crisis between July 2008 and April 2009
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