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Posts Tagged ‘cnh’

But this first, from BAML… While everyone was expecting a yield rally this summer, it seems like that hasn’t been the case. Even with food prices jumping due to the winter this year (due partly to higher natural gas to keep everything from cattle to corn warm), core CPI is relatively subdued. There also seems to be a shortage of 30Ys, which naturally means bond prices should go up and yields come down. Talk about a contrarian move.

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We are currently entering wave c for 10 Yrs. This pattern, quite dangerously, is also an HS pattern. Though the resistance is quite strong at the neckline with two former tops in 2011 and 2012, a break could spell a lot of danger for the dollar. Even if we don’t break the 2.400% line, the path of least resistance is still down, and we have some room to go. Thus, anything long USDxxx would not be constructive.

For the USDCNH which has thrown out more than a few traders, there might be a good opportunity for those who want to trade the dollar weakness without going USDJPY. The USDJPY is less intervened against, but this post is to see where we can enter a comfortable long term USDCNH trade. Though with the way USDCNH trends, it is entire acceptable to enter with more confirmation.

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Watch that there has been a false break once before early April, which was denied by a morning star. But, there are other signs of confirmation for this break:

1.  It is marked with a shooting star on 4/30 (which can be combined into several other reversal indicators with adjacent candles).

2. Negative divergence on RSI, which has also passed below 70 again. Negative CMF too, which indicates less momentum upwards, as well as a cross into 0.

3. Heiken Ashi reflecting that shooting star (though blue), and trend downwards. 

So technically, I feel comfortable enough with a short trade. Probably put in 20k short at 6.2323 (current price), stop at 6.3000 and targeting 5.xxxxx or something. Risk reward back to 6.0000 (not impossible) is 3:1. Will be gaining rolls too.

Also, did you see that descending triangle breakout on gold?

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Also, I passed my CMT Level II. However to get my Series 86 exempt, I would need to have a current CRD… (though I can apply for it within two years). Someone hire me?

To the best of good buys.

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Amazing how the two fibs fit so well together.

This is a reference to where the bleeding might stop. As noted here by Morgan Stanley, the rebalancing is continuing, and per DB, the assumed breakeven point for the products built on top of USDCNH is at 6.25. Now that we have passed it, there are two simple resistances. Only after conclusive reversal signals (possibly over the span of a month) would I look at selling the pair. Note the rounding top from 3/27 to 4/9 which was invalidated with another run higher.

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Studying for CMT Level II… test this Saturday. Wish me luck!

To the best of good buys.

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What is the CNH and How to Trade It

Practically the same thing I wrote for the firm, with a bit more complexity and more delicious charts for this blog’s readers.

What better time to post this than on the day JAN CPI came in 4.5% v 4.0% exp and 4.1% prev. I think analysts are supposed to expect the seasonality of New Year’s spending, but no one is certain who has what finger in what government department.

Will the PBoC/Politiburo tighten? There will definitely be expectations, but this jump is more due to New Year’s Spending than anything else. Yes, it should have been seasonally accounted for (YoY data here) but there is certainly some kind of pickup in the domestic Chinese economy.

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What is the CNH?

For our purposes, it’s a tradeable (read leveraged) version of the elusive CNY. For most people who want to buy CNY or sell USDCNY have found it hard to do so, since it is not a freely traded currency. It sometimes follows correlations with its trading partners, but more or less it’s been its own animal, being pegged by the officials in order to calm or foster the domestic economy.

In fact, a book I’m reading right now says the rate mechanism is largely decided by a complex set of inflows and outflows of yuan and trying to mask it with real growth vs dollars and yuan. Doesn’t make any sense? The PBoC is simply trying to do what the market does (in terms of supply and demand). If you want the book, the ISBN is 9787500486756.

So what we have here is a long term investment method for the USDCNY. Best of all,  it gives positive selling rolls. Current deposit interest is around 4%, so it should be something similar to NZD’s rolls (after accounting for the other costs).

Notice that gap of rates in September 2011 or so? That’s the speculative forces of market demand working its magic. Because the CNH follows CNY but is affected by supply and demand, it gives speculators like us a way to make best on data – which is more or less the only way the CNY can be traded as of right now.

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Surely there’s an arbitrage opportunity?

Theoretically, yes. But in practice, not really. There’s no such thing as a free lunch, but the only opportunity I think this could provide will pay only for a packet of chips.

The USDCNH, though a real currency traded in HK, is still limited by credit controls. The USDCNH is basically USDCNY sterilized by cash imports, trade and swap lines by the HKMA and PBoC and companies traded in Hong Kong. However to convert it back out, there is a limit of CNY20000 per day. At that point, you can withdraw it and then convert it across the river in Shenzhen or in the Chungking Mansions.

To realize how small potato CNY20000 is, let’s do 1 year’s worth of calculations from USDCNY 6.7000 to USDCNY 6.3000. For the daily limit of CNY20000 (only around $3k) the profit on that is around $189.60. To put that in perspective, my first lot of $2500 during the summer was brought up to $4500 in around 3 months. Took out $4000 and bought the miata, and basically lost the rest.

Fuzzy maths, but considering the best case scenario where the rate went from 6.7 to 6.3 over 90 days, the change needs to be halved (assuming a flat rate) and then put over the 90 days. But in that case, the total capital put down would basically be CNY1.8m, plus an extension of 90 days for the rest of the capital to play out. (Or CNY900k to get the potential maximum of 6.7-6.3 rate flux.

However, keep in mind my return annualized from 3 month’s worth of data was basically around 1050%. Do a simple risk analysis with S&P +6% (ha!) and you can see my risk is just an insane amount.

This limit is actually put in place by the PBoC. You can’t stop arbitrage with two different prices of basically the same thing, but you can definitely try to make it really hard. To make it harder, USDCNH can not be converted for USDCNY on an electronic basis, unless you have a domestic license to deal in both. But in that case, you would only be dealing with the domestic CNY.

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Without arbitrage, how to trade it?

That chart is the poster-baby of bad causation analysis.

The main indicator of what the PoliBoC will do right now is the CPI, and to an extent the GDP figures. There’s the other 3, including manufacturing PMI and odd reserve requirement ratio and deposit rate (infrequent but effective), but the markets are more or less watching inflation and output.

Understanding the current CNH market requires a basic knowledge of post-2008 Chinese economic policy. The Chinese government and People’s Bank of China are currently involved in a balancing act – maintaining relatively stable economic growth while preventing economic overheating to keep inflation pressures in check. Since 2011 and the greater popularity of the CNH, markets expect weaker output and manufacturing data to influence easing by weakening the Chinese currency, and higher inflation to result in an appreciation in the peg to help stem price pressures.

This policy view would help to explain the large fluctuations in the USDCNH in the third and fourth quarters of last year. The spread between the USDCNH and USDCNY has been negative since the offshore RMB’s introduction. The negative spread between the two crosses proves higher demand for the CNH versus the value of the CNY as set by the People’s Bank of China, and as investors offset the more expensive offshore currency against its onshore brother accounting for positive yields received on selling the USDCNH pair.

Even though major economic data do drive the USDCNH pair, it is still nevertheless correlated with the PBoC-set USDCNY rate. Because of the relative illiquidity of the offshore pair, the effect of expectations and data reports can be primarily seen on longer term price comparisons, as spreads tend to eliminate short term fluctuations. Hence because of these characteristics, the USDCNH is currently best traded on a longer term timeframe.

So basically what it boils down to, like most currencies, is what you expect inflation to be and what the government will do, along with monitoring to see if other traders see basically the same thing.

But I can’t stress enough of the fact that this is only suitable for longer term trades. Think of this as EURSEK or EURNOK (which also shares many of the same trading aspects).

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Up for part 2, more correlations and another possible way to play with the 2 prices of currencies. Here are the charts so far. RCNHCharts

To the best of good buys.

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Spreads between USDCNH and USDCNY

Or rather, proof that positive yields have an effect on fair market value.

Can’t publish all of my findings here since this is a report for the firm. But, since that’s going to be watered down a lot for CS and regular retail customers, I’m going to put all the fun data analysis between these 2 derivatives of the RMB (out of 3) here. With all the data and excels, of course.

The more I run the big 5 data (CPI, GDP, Reserve Ratios, Best Deposit Rates, Manufacturing PMIs) against the USDCNH, USDCNY and their spreads, the more I see ways of arbitraging this (after all, both are essentially RMB).

Even though these two are not convertible, as per PBoC regulations, I think there is a way to withdraw these semi-deliverables into cash in HK at the current price. Then all it takes is a walk across the border…

Do you see that period of positive spreads in 3Q 2011? That could have meant cash money. Yes… cash money.

A less watered down version of my findings shall be here soon…

To the best of good buys.

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This is supposed to be a joke, but it’s picking up too many Google hits. Here’s how really to make one with Word 2007, 2010 and beyond. (With pics!)

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Ham it out with paint.

I thought there was a way, but then found out that was for 2 different graphs (price v volume). Luckily other things in the Microsoft suite takes care of it haaaa

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