Basic Guide to Trading USD to RMB
The USD/RMB currency pairing is becoming more popular these days as traders have developed a greater interest in the rising Chinese economy. The RMB to USD pairing refers to the Renminbi to US Dollar, the Renminbi being the official currency of the People’ Republic of China. Although the Yuan (CNY) is the unit of currency, Renminbi is the overall name of the currency itself, with the relationship between the two being similar to the terms Sterling and Pound for the UK’s currency. The word Renminbi translates as “people’s currency” whereas the meaning of Yuan is translated as “round.” The USDRMB pairing is the 8th most traded in the international Forex market and it is the most popular pairing that contains the Chinese currency. Overall, the Renminbi is the 9th most popular world currency for trading and when combined with the US Dollar it is considered to be an exotic currency pair which may be best suited to more experienced traders.
The Chinese Economy and the Yuan
The sole currency of China is the Yuan, which is now the 9th most traded global currency overall and the 2nd most frequently used currency for global trade finance. 50 countries use the Yuan in the settlement of 10% of their Chinese trades, and the currency is being used more and more frequently for settling international financial transactions. The Yuan is regulated by the PBC (the People’s Bank of China) and is symbolised with the unit ¥. In the Forex market it is sometimes identified with the code RMB and sometimes with the code CNY with CNH representing the offshore Yuan market. One Yuan consists of 10 Jiao, with every Jiao being made of 10 Fen. The Yuan was established in 1948 and in 1983 the PBC was designated as the country’s central bank. The Renminbi Yuan has been reissued 5 times, with the most recent of those being in 1999. The modern Yuan was introduced during the Chinese civil war as a means of consolidating territory while providing a stable alternative to the CNP’s gold standard which was responsible for the nation’s hyperinflation of the time. Initially, the Yuan was pegged to the US Dollar but this was lifted during 2005 and now the Yuan is managed by setting a daily fix against several international currencies, with the US Dollar being the key currency, and then permitted it to trade within a band of 2%. This is a dirty float, or managed float, and does not apply to the CNH market, which has a wider trading band. Since the Yuan unpegged from the Dollar, it has appreciated steadily against the majority of international currencies and its international liquidity is being improved.
The Chinese economy is the 2nd largest in the world for its GDP and the largest in terms of PPP. It makes up over 9% of global GDP and it is also the largest exporter of goods in the world. The country’s leading industries include furnishing, apparel, machinery, integrated circuits and textiles. It mainly exports to the US, Japan, Hong Kong and South Korea. The nation’s primary imports include components for nuclear reactors, oil, machinery, medical equipment, motor vehicles, soy beans and metal ores, importing the majority of these from South Korea, the US, Japan, Germany, Taiwan and Australia.
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Facts About the US Dollar and the US Economy
The US Dollar plays a vital and unique role within the world of international financial operations, being the most commonly accepted currency for reserves around the world and being the key instrument in the settlement of international financial transactions. The Dollar is known as a stable currency and therefore it is not only used by the US itself but also by a large number of smaller countries who have elected to use the Dollar as their own form of currency rather than creating their own. Many more countries peg the value of their own currency to that of the US Dollar. The American currency is used to set the price of gold and other popular commodities and it is the currency chosen for the transaction of OPEC oil sales. These factors all combine with the result of making the US Dollar the world’s most important currency as well as the most frequently traded worldwide. The United States economy is the biggest in the world in nominal terms, but only the second biggest behind China in terms of PPP. The US represents 22% of the global nominal GDP with a GDP of around $18 trillion. The US has a wealth of natural resources, and this combined with the nation’s high productivity and developed infrastructure has led to GDP growth at a stable rate. The USA is the world’s greatest producer of oil and natural gas as well as being the 2nd greatest manufacturer in the world, being responsible for a fifth of the global manufacturing output. Their economy is also very dependent on its service industry, with a large number of the world’s most important companies having the headquarters in the USA.
Why Trade the USD/RMB?
The USD RMB pair is considered to be an Exotic one as it pairs the major US Dollar currency with the emerging Yuan. As this pairing is not traded as frequently as either the Major or Cross pairs, the cost of trading it will often be higher due to less liquidity in the market. There are some advantages to trading an exotic pairing such as the USDRMB.
- Predictability – with the lower pace of trade and lower volume in this market, the action of prices is more predictable with more discernible pip-wise movements and trading patterns. This make long lasting trades a viable possibility.
- Fewer traders – the higher cost of USD/RMB transactions and the relative low exposure of this currency to the Forex trading community means that non-serious investors and speculators are often excluded from this market. This means that there are fewer traders and those who commit to this market are those who are confident and experienced.
- Diversification opportunities – the USD to RMB trade tends to attract experienced traders and investors who wish to diversify their portfolio. This market allows them to try out something more unusual that will bring in a higher level of profit when the trade works out successfully.
- Challenging opportunities – the uniqueness of the RMB to USD market represents a challenging opportunity for experienced Forex traders, enabling them to develop their own formula and strategy to achieve the greatest success in this unusual market.