So various markets around the world are showing signs of recurring stress akin to that experienced at the onset of global financial crisis in 2008/09. Then, as now, the dollar is experiencing (some) appreciation. What is behind this seemingly inexplicable phenomenon of the terminally sick man of North America's currency performing (ever-so-slightly) better?An explanation that works for me is that of bets being placed on higher growth areas of the world being unwound because of trouble at home. That is, shoring up liquidity is not such a bad idea when you predict that bad times will roll. And so it is that we observe a sell-off of sorts in the yuan offshore market of Hong Kong. As most of you know, the Hong Kong Monetary Authority (HKMA) has been at the forefront of China's effort to internationalize the RMB. What is particularly interesting this time around now that we have an active offshore market is that the Hong Kong yuan is trading at some discount to that of the mainland (which is not as readily obtainable and is thus less subject to speculative trading). From MarketBeat:
It’s a sign of global market stress that Chinese yuan traded in Hong Kong is now at a record discount compared to yuan traded on the mainland. The reason is global investors are liquidating positions in every type of speculative bet, including yuan, no matter how good the underlying fundamentals may be. Investors need U.S. dollars to pay back margin loans and make up for losses elsewhere in their portfolios.Why discard superior yuan holdings to dubiously dabble in dastardly dollar detritus? The simple explanation is that falls in the market value of dollar-denominated holdings--let's take the typical example of equities--results in "margin calls" or requests by brokerage firms that more cash be added upfront instead of relying on "margin loans" to acquire or hold assets via leverage. It's the same old story: credit flows less freely in periods of high market stress (such as now), making creditors require more liquid assets such as US dollars.
The yuan in Hong Kong, known to currency wonks as CNH, traded Friday as wide as a 2.5% discount to the onshore variety, known as CNY. It’s come back to about 1.5%. Those moves don’t sound like a lot, but it’s a record spread in the short history of China’s experiment in currency liberalization. And it’s probably troubling to companies that use Hong Kong yuan forwards markets to hedge the currency risk of investments they’ve made on the mainland [since Hong Kong-traded yuan is not tracking the performance of its mainland counterpart].
It's not that reasonable people prefer US dollars, but that the currency remains the most widely accepted one for "topping up" trading accounts hit by margin calls.
