India rupee-Chinese yuan carry trade to hold appeal until US election outcome, fx analysts say
By Jaspreet Kalra and Nimesh Vora
MUMBAI, July 3 (Reuters) -Playing the currencies of the world's two most populous nations against each other has been a popular choice for carry traders and will hold its appeal until at least the results of the U.S. elections later this year, traders and currency analysts said.
The Indian rupee's higher yield differential than the Chinese yuan -- by 5.5 percentage points on 1-year rates -- the divergent outlooks of the currencies and their low volatility have made using the yuan to fund long bets on the rupee among the most attractive carry trades in Asia.
While there is no measure or data point to gauge the size of positions on the yuan-rupee carry, a senior banker estimates it to be nearly $40 billion based on the flows of his clients.
The rising prospect of another presidential term for Donald Trump is only expected to burnish this trade's appeal.
Trump kicked off a trade war with Beijing in his first term and has indicated he would continue to target the Asian nation if he wins another term. The odds of that happening rose after the recent debate between Trump and President Joe Biden.
The yuan will "have to contend" with the likelihood of increased U.S. and China tensions and will remain under pressure, said Lloyd Chan, senior currency analyst at MUFG Bank.
China's central bank is likely to allow measured weakness in the currency heading into the U.S. elections, which may drive the offshore yuan lower towards 7.35-7.40, said Brad Bechtel, head of foreign exchange at Jefferies.
The yuan was last at 7.3062 per dollar and the rupee at 83.52.
The rupee, though, is expected to be well supported by portfolio inflows and an upbeat economic outlook in comparison to China's, which has sputtered due to the protracted troubles in the real estate sector.
All in all, the pressure on the yuan is higher than on the rupee, Societe Generale said in a note.
The common factor is both currencies have low volatility relative to their Asian peers, largely due to active forex management by the respective central banks.
That, combined with the wide interest rate differential, adds to the trade's appeal, Bechtel said.
Realised and implied volatility of major Asian currencies https://reut.rs/4eRjjX5
Reporting by Jaspreet Kalra and Nimesh Vora; Editing by Savio D'Souza
Related Assets
Latest News
Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.
All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.
Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.
