AUD and RMB positive correlation can reduce hedging needs

Exchange rates between Australia and China move in tandem against the US dollar, implying low cross-currency rate volatility and less need for hedging, says ANZ.

  • 30 Jan 2013
Email a colleague
Request a PDF

It makes sense for both China and Australia to settle bilateral trade in the renminbi, given the positive correlation between the two currencies against the US dollar.

The highly positive correlation between the Aussie dollar and renminbi potentially offer both importers and exporters in Australia and their Chinese counterparties cost saving opportunities, according to ANZ in a research note released on January 29.

“As the exchange rate of the two currencies move hand-in-hand against the US dollar, the cross-rates should be less volatile,” said Li-Gang Liu, Greater China chief economist at ANZ. “Two parties can spend less on hedging as the exchange rate of their own currency against the US dollar will no longer concern them. This benefit is clear as reflected by the historical volatilities of their currencies.”

Despite the strong flow between China and Australia – where the former accounted for 29% of the latter’s total exports and 18% of total imports – at present very few bilateral trades are conducted in renminbi – also known as the yuan.

According to data from the Australian Bureau of Statistics, other currencies – which include the Canadian dollar, Singapore dollar and renminbi – accounted for less than 0.3% of Australian exports and 2.0% of imports in 2011 and 2012. US dollar remains the most heavily-used currency for Australian exports and imports.

In fact, the US dollar has been gaining in recent years while the role of the Australian dollar has been diminishing.

“The low penetration of renminbi trade settlement is understandable as this renminbi option was made available only recently,” said Liu. “Our trade financing colleagues were engaged in conversations with 49 clients in November or December 2012 with an aim to provide a general understanding of the appetite of Australian exporters and importers for renminbi trade settlements.”

ANZ found that over 95% of the respondents indicated that they were aware of the ability to use the Chinese currency as the invoicing currency. With this high level of awareness, it was no surprise that less than 50% of the respondents are interested to learn more about renminbi.

Despite this, the penetration of the Chinese currency settlement remains low. Only 10% of ANZ’s trade clients had a renminbi settlement experience.

Additionally, the bank has also discussed with corporates and commercials why they prefer not to use the renminbi in trade.

“Many of them claim it was their counterparties in China who prefer using US dollar in trade, especially where the Chinese side is an exporting entity that wants to receive US dollar,” said Liu. “Overall, most respondents said they were comfortable to deal with the US dollar in their China trade.”

On the bright side, corporates possess an open-mind towards renminbi trade settlement. About 48% of them replied positively when asked if they envisage more settlements in the Chinese currency in the future, notes ANZ. Another 40% of them are willing to consider but it is situation-dependent.

For instance, if they or their Chinese suppliers see tangible benefits, they will consider doing that. In fact, some companies are already in discussions with their counterparties to engage in renminbi settlement, adds the bank.

Additionally, based on ANZ’s discussion with its product sales colleagues, the bank also identified several factors that may impede a greater use of renminbi in trade settlements.

“It seems that many Australia companies and their Chinese partners do not have a consistent understanding of the procedural requirements in dealing with renminbi trade settlement,” said Liu. “In some cases, they do not know the official policy. Their trading partners and regulators in different local provinces may adopt some practices that do not entirely follow the national spirit.”

“Resistance to change remains. Foreign exchange risks and the associated cost of hedging have not been fully revealed in trade negotiation,” he added. “The cost savings from using Aussie dollar and renminbi do not seem to have been factored in when exporters and importers are negotiating their terms of trade.

  • 30 Jan 2013

Bookrunners of International Emerging Market DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 8,935.41 24 14.02%
2 HSBC 7,859.72 26 12.33%
3 Deutsche Bank 7,109.78 16 11.15%
4 JPMorgan 4,850.50 14 7.61%
5 Standard Chartered Bank 3,055.20 19 4.79%

Bookrunners of LatAm Emerging Market DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 4,285.53 5 18.23%
2 Deutsche Bank 3,977.43 2 16.92%
3 HSBC 3,768.59 4 16.03%
4 JPMorgan 2,812.07 8 11.96%
5 Bank of America Merrill Lynch 1,803.06 7 7.67%

Bookrunners of CEEMEA International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 3,236.25 7 20.59%
2 HSBC 2,253.75 3 14.34%
3 Deutsche Bank 1,703.96 4 10.84%
4 Standard Chartered Bank 1,518.77 3 9.66%
5 JPMorgan 1,341.27 2 8.53%

EMEA M&A Revenue

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 02 May 2016
1 JPMorgan 195.08 50 10.55%
2 Goldman Sachs 162.26 37 8.77%
3 Morgan Stanley 141.22 46 7.64%
4 Bank of America Merrill Lynch 114.20 33 6.18%
5 Citi 95.36 35 5.16%

Bookrunners of Central and Eastern Europe: Loans

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 ING 3,668.64 29 9.07%
2 UniCredit 3,440.98 25 8.50%
3 Sumitomo Mitsui Financial Group 3,156.55 13 7.80%
4 Credit Suisse 2,801.35 8 6.92%
5 SG Corporate & Investment Banking 2,478.18 21 6.12%

Bookrunners of India DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Standard Chartered Bank 126.67 2 7.81%
2 Sumitomo Mitsui Financial Group 81.25 1 5.01%
2 SG Corporate & Investment Banking 81.25 1 5.01%
2 Morgan Stanley 81.25 1 5.01%
2 JPMorgan 81.25 1 5.01%