The eur/cnh, currently 7.2421 (euro/offshore yuan 4:00 pm, New York) fell from 8.6902 in May 2014 to 6.5520 this past April. It bounced to 7.1113 in early May but was trading around 6.8500 on Monday before the Chinese devaluation, representing about a 21% fall from last May’s top. It is hard to tell the amount of liquidity in this cross or the size of the extant market positon before the Chinese devaluation, but that is a substantial move, leaving the market short.
Short eur/cnh, of course is short the euro, long the yuan. The eur/yuan cross rate is calculated by multiplying the eur/usd rate by the usd/yuan rate. Currently 1.1170 x 6.4800=7.2380 (4:00 pm).
There are two ways to cover a cross position, directly in the market by buying euro and selling the yuan against each other or what is called ‘over dollar’ where you two execute separate trades in the component currencies.
In this case the over dollar cover of a short eur0/yuan position is buying the euro against the U.S. Dollar and buying the U.S. Dollar against the yuan, selling the yuan. The result is the same as the cross trade. Traders will often work over dollar because the liquidity and sometimes pricing in the components can be better than in the cross.
When the Chinese devalued the yuan, it drove usd/yuan rate much higher, from 6.2143 to 6.3303 in the first hour, 1.9%. More yuan per U.S. means a weaker yuan. Because the eur/yuan is a product of the eur/usd and usd/yuan rates that pushed the cross higher, from 6.8520 to 6.9590 in that first hour.
There is no inherent reason why the adjustment in the eur/yuan cross necessitated by the yuan devaluation (soaring usd/yuan rate) could not be absorbed by one side of the cross. In the first hour of the devaluation 21:00 (NY) on the 10th, the euro/usd lost about 50 points, the entire move higher in the eur/cnh had been taken by the soaring usd/cnh rate. Throughout the Asian market on the 10th and 11th the eur did not move up. It was only when Europe came in about 3:00 am (NY) our time on the 11th that the euro began to climb.
All in all the offshore yuan has lost about 3.5 percent against the dollar, 4.7 percent against the euro and the euro has gained 1.2 percent against the dollar as of this conclusion (5:30 pm NY).
Some portion of the euro move is separate from the cross and probably related to the drop in U.S rates over the last two days and the reduction in the chances for a September Fed Funds rate hike due to global and China concerns and falling U.S. equities.
Chief Market Strategist
WorldWideMarkets Online Trading