CNY/USD Currency Pair Explained
The currency pair CNY/USD is becoming increasingly popular with all kinds of investors due to the rise in interest in the Chinese economy. This pairing refers to the Chinese Renminbi currency and the US Dollar. The Renminbi is the official Chinese currency (sometimes referred to in trading as RMB). However, each unit of currency is known as the Yuan. Similar to the UK currency, which is known as Sterling but with each unit being called the Pound, the Chinese currency is the Renminbi (which in translation means “people’s currency”), with each unit being the Yuan (or CNY), which means “round” in translation. This currency pairing is the most popular one containing the Chinese currency, and the eighth most-traded on the international Forex market. When combined with the US Dollar it is deemed to be an exotic pairing, and is therefore best suited to only the most experienced of investors.
The Yuan and the Chinese Economy
The Yuan (written as ¥) is the People’s Republic of China’s sole currency, and is now the ninth most-traded currency worldwide. It is also the second-commonest currency in global trades, with 50 countries using the Yuan when settling 10% of their trades with China. The People’s Bank of China (PBC) is responsible for regulating the Yuan, and in the Forex markets, the currency is usually represented with the code CNY, although sometimes it is also represented by RMB (Renminbi) or CNH for the offshore Yuan market. Each Yuan is made of 10 Jiao, and each Jiao consists of 120 Fen. The Chinese Yuan was established back in 1948, and the People’s Bank of China was declared as the central bank for the nation in 1983. The most recent re-issuance of the Yuan was in 1999, being the fifth time since 1948 that the currency has been issued. The modern Yuan was brought into being during the Chinese civil war, with the aim of giving a stable alternative to the gold standard introduced by the CNP while consolidating territory. Originally, the currency was pegged to the United States Dollar, but this was changed in 2005, with the peg being lifted. Today, the Yuan is managed by the setting of a daily fix against a number of international currencies, and primarily the USD, with a permitted trading band of 2%. This is called a managed or dirty float, although it does not apply to the CNH offshore market, which benefits from a wider band of trading. Since 2005 when the Yuan was unpegged from the USD, it has seen steady appreciation against most world currencies, and the government are working to improve its international liquidity.
The economy of the People’s Republic of China is the second biggest in the world by GDP, and the biggest in terms of PPP, with America a close second. China is also the world’s largest goods exporter, with its primary industries comprising furnishings, machinery, clothing, textiles and integrated circuits. The main countries to which China exports include the United States, Hong Kong, South Korea and Japan. China also has a strong import market, relying on South Korea, Japan, the United States, Taiwan, Germany and Australia to supply the majority of its oil, nuclear reactors, medical equipment, machinery, soy beans, metal ores and motor vehicles.
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Facts About America’s Economy and the USD
The United States Dollar has a unique and vital role to play in international financial operations. It is the commonest reserve currency used by central banks worldwide, and is also a major instrument in the settlement of most international financial transactions. It is a stable currency, and is therefore adopted by numerous small countries as their own national currency, while many other nations also peg their own currency to its value. The USD sets gold prices and the prices of most other commodities, as well as being the chosen currency for the transaction of OPEC countries’ oil sales. When all these factors are taken into account it is easy to see why the USD is considered to be the globe’s most important currency, and why it is the world currency that is most frequently chosen for Forex trading purposes. In nominal terms, the US economy is the biggest in the world, and it is the second biggest after the People’s Republic of China in terms of its PPP. The United States is responsible for 22% of the world’s nominal GDP, its GDP being around $18 trillion. America has a host of natural resources which, when combined with the nation’s developed infrastructure and high productivity, has led to the country’s GDP growing at a steady rate. America is also the world’s biggest producer of natural gas and oil, and the world’s second-biggest manufacturer, responsible for a fifth of global manufacturing output. The American economy is dependent upon its services industry, and many of the globe’s key companies have their HQs within the United States.
Why Trade the CNY/USD Pair?
The CNY/USD pair is an exotic currency pairing, as it twins the US major currency with an emerging one, the Chinese Yuan. Because there is less trading of this pair when compared to the Cross and Major pairs, there is less market liquidity, which leads to a higher cost of trading. There are, however, several advantages to choosing to trade the exotic CNY/USD pair:
- Predictability – As there is a lower trading volume and slower trading pace in the CNY/USD market, price action can be predicted more easily, making long-term trades a possibility.
- Fewer traders – CNY/USD transactions have a higher cost than that of major pairs, and when combined with the lower exposure of this pairing to the global Forex trade community, it means that speculators and casual investors are excluded from the market. This results in fewer traders.
- Opportunities for diversification – The CNY to USD trade usually attracts more experienced investors wishing to develop a more diverse portfolio of investments. The CNY/USD market enables them to try a more unusual market, which may bring a greater profit should the trade work out successfully.
- Challenging opportunities – As the CNY/USD market is quite unique, it represents a more challenging opportunity for experienced Forex traders, which enables them to create their own strategies and formulas in order to achieve a higher level of trading success.