China Introduces Direct Trading Between RMB and CHF

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// ]]>Over the night China launched direct trading between RMB and CHF according to the China Foreign Exchange Trade System statement.

In order to promote the bilateral trade and investment between China and Switzerland…with the authorization of the People’s Bank of China, the direct trading between RMB and CHF will be launched on the inter-bank foreign exchange market from November 10th, 2015, onward

The decision to allow direct conversion is part of China’s efforts to internationalize its national currency and promote its inclusion in the so-called currency basket of the International Monetary Fund (IMF).

Earlier in July, my colleague Yagub Rahimov also commented about the upcoming changes in IMF and the world currency basket, which in October was also confirmed by the IMF themselves that the Global Financial Regulator was planning to make changes to their decision on enlarging the Special Drawing Rights (SDR) currency reserve basket to include the Chinese yuan by November.

It appears that today’s Chinese initiative is part of long-term strategic goals of the Chinese government to reduce the dependence of the currency on the US dollar. China has taken a series of reforms in recent months to liberalize markets, as well as to help the yuan meet Special Drawing Rights (SDR) criterion, allowing the currency to be used in international payment and trade.

The Special Drawing Rights (SDR) currencies together act as the international currency reserve. The value of the international reserve is currently set by the US dollar, Japanese yen, British pound and the euro.

What does this mean for traders?

May the RMB be added into the Special Drawing Rights (SDR) currency basket it is likely that we will see a shift in global economic power, as Chinese RMB has already surpassed the Japanese Yen in global circulation and became the 4th most utilized currency in the world, we are likely to see this shift to continue.

The biggest impact is expected to be on the US Dollar. As the largest global currency reserve is being held in USD all across the world by every central bank once the RMB becomes a part of the Special Drawing Rights (SDR) reserve currency unit we are likely to see depreciation in the USD value.

Why will USD depreciate?

To put it simply Central Banks will need to sell part of their reserves in either their own currency or in foreign reserves to cover the RMB, hence more supply in the market will push the prices further down.

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