The Offshore Renminbi Exchange Rate: Microstructure and Links to the Onshore Market*

Yin-Wong Cheung & Dagfinn Rime

Prepared for the CAFIN Workshop University of California, Santa Cruz April 25-26, 2014

Introduction

International use of the RMB

9th most actively traded (2013; 17th, 2010) 2nd most used in traditional trade finance (October 2013) 12th payments currency of the world (October 2013)

Offshore markets: 0.398 B. (2007) to 3.903 B. (2013) One currency, two exchange rates RMB; CNY, CNH CNY: Onshore

Trading band around daily fixing Managed

CNH (2010): Offshore “Market” determined No intervention

The current study Microstructure determinants of CNH Interactions between CNH and CNY Effects of fixings on CNH and CNY Forecast performance of CNH and CNY Data Reuters trading system (“D2000-2”); tick-by-tick Interbank trading

Signed transactions Difference of limit bid and offer orders

Normalized daily variables (00:00-18:00 GMT)

September 27, 2010 to August 27, 2013

Upward crawl vs the US$ Variance(CNH) > Variance(CNY) > Variance(Fixing) Variance(CNY) ↑ CNH ~ CNY; exceptions

  

Move in “tandem”

Empirical Analysis

CNH and Microstructure Variables

Ht: CNH return Xt: order flow Ft: 3-mth interest differential volat: EM currency Volatility index LOIm: limit-order imbalance

(1) (2) (3) (4) Constant -.013 -.013 -.008 -.007

(-1.98) (-2.08) (-1.37) (-1.30) Ft .039 .018 -.019 -.02

(1.38) (.65) (-.78) (-.82) Ht-1 -.085 -.114 -.123 -.123

(-.76) (-1.08) (-.95) (-.94) volat 2.196 2.244 2.205

(3.94) (4.22) (4.15) Xt .095 .092

(5.55) (5.45) LOIm .006

(2.11)

Adj. R2 .01 .08 .20 .21

The VECM of (Ht, Xt, F t)

Ht Xt Ft

ECt-1 -.0264 1.5538 -2.0404(-3.07) ( .74) (-2.46)

Ht-1 -.0986 -5.5316 -4.1240(-2.65) (-.61) (-1.15)

Xt-1 .0004 .0011 .0137 ( 2.74) ( .03) ( .92)

Ft-1 -.0005 .0864 -.2936 (-1.46) ( 1.00) (-8.58)

C -.0001 -.0143 .0021 (-1.93) (-.91) ( .34)

Adj. R2 .0283 -.0026 .1006

ECt-1: Ht -.0012 Xt +.0108 Ft

The CNH VECM (Ht, Xt, Ft) + augmented variables

(1) (2) (3) (4) (5) Constant -.0001 -.0001 -.0001 -0.0001 -0.0001

(-1.96) (-2.08) (-1.16) (-1.24) (-1.01)ECt-1 -.0264 -.0187 -.0080 -0.0073 -0.0093

(-3.07) (-2.24) (-1.06) (-0.98) (-1.31)Ht-1 -.0986 -.1215 -.1141 -0.1590 -0.1405

(-2.65) (-3.37) (-2.96) (-3.97) (-3.67)Xt-1 .0004 .0003 .0002 0.0003 0.0003

( 2.74) ( 2.02) ( 1.85) (2.19) (2.27)Ft-1 -.0005 -.0005 -.0003 -0.0005 -0.0007

(-1.46) (-1.51) (-1.07) (-1.41) (-2.26)volat .0207 .0219 0.0227 0.0208

( 7.60) ( 9.00) (9.07) (8.69)LOIm t-1 .0001 0.0000 0.0000

( 1.76) (0.93) (1.22)LOIm 0.0001 0.0000

(2.90) (1.64)Xt 0.0010

(7.90) Adj. R2 .03 .10 .12 0.15 0.23

ECt-1: Ht -.0012 Xt +.0108 Ft

Offshore and Onshore Interactions

The VECM of (Yt, Ht)

Yt Ht

ECt-1 .001416 .065539 ( .15) ( 4.21)

Yt-1 -.14084 .049671 (-3.47) ( .73)

Yt-2 -.01664 .121189 (-.41185) ( 1.79200)

Ht-1 .022432 -.08021 ( .93) (-1.98)

Ht-2 .039698 -.08132 ( 1.66) (-2.03)

Constant -.00013 -.00012 (-3.29) (-1.80)

Adj. R2 .013 .037 ECt-1: (Yt-1 - 1.0735Ht-1)

The VECM(Yt, Ht) + augmented variables (1) (2) (3) (4) (5) Yt Ht Yt Ht Yt Ht Yt Ht Yt Ht

Constant -.0001 -.0001 -.0001 -.0001 -.0001 -.0001 -.0001 -.0001 -0.0001 0.0000(-3.29) (-1.80) (-3.41) (-1.92) (-3.41) (-1.92) (-3.42) (-1.92) (-2.59) (-0.70)

ECt-1 .0014 .0655 -.0036 .0543 -.0032 .0547 -.0031 .0545 0.0025 0.0696( .15) ( 4.21) (-.39) ( 3.61) (-.35) ( 3.63) (-.34) ( 3.62) (0.26) (4.86)

Yt-1 -.1408 .0497 -.1256 .0839 -.1240 .0857 -.1216 .0749 -0.0556 -0.0419(-3.47) ( .73) (-3.15) ( 1.28) (-3.10) ( 1.31) (-3.03) ( 1.14) (-1.25) (-0.65)

Yt-2 -.0166 .1212 -.0191 .1143 -.0198 .1134 -.0194 .1117 -0.0239 0.1187(-.41) ( 1.79) (-.48) ( 1.75) (-.50) ( 1.74) (-.49) ( 1.72) (-0.53) (1.83)

Ht-1 .0224 -.0802 .0043 -.1208 .0054 -.1196 .0083 -.1325 -0.0009 -0.1043( .92) (-1.98) ( .18) (-3.06) ( .22) (-3.03) ( .34) (-3.31) (-0.03) (-2.40)

Ht-2 .0397 -.0813 .0371 -.0856 .0378 -.0847 .0378 -.0847 0.0423 -0.0417( 1.66) (-2.03) ( 1.57) (-2.21) ( 1.60) (-2.19) ( 1.60) (-2.19) (1.48) (-1.01)

volat .0091 .0213 .0090 .0211 .0091 .0206 0.0077 0.0202( 5.58) ( 7.93) ( 5.49) ( 7.85) ( 5.53) ( 7.63) (4.68) (8.53)

Ft .0002 .0002 .0002 .0002 0.0001 -0.0001( .99) ( .68) ( 1.01) ( .64) (0.46) (-0.42)

Xt-1 -.0001 .0003 0.0000 0.0003(-.65) ( 1.77) (-0.19) (2.44)

Xt 0.0003 0.0010(3.87) (8.04)

Adj. R2 .01 .04 .05 .11 .05 .11 .05 .11 0.06 0.25

(6) (7) (8) (9) (10) Yt Ht Yt Ht Yt Ht Yt Ht Yt Ht

Constant -.0001 .0000 -.0001 .0000 -.0001 .0000 .0000 .0003 .0000 .0001 (-2.60) (-.71) (-2.57) (-.66) (-1.42) (.25) (-.10) (5.54) (.00) (2.31)ECt-1 .0026 .0718 .0029 .0726 -.0006 .0682 .0248 .2484 .0158 .1102 (.26) (5.00) (.29) (5.07) (-.07) (4.36) (1.65) (10.99) (1.47) (6.32)Yt-1 -.0576 -.0487 -.0593 -.0531 -.0890 -.0737 -.0985 -.1416 -.1020 -.1068 (-1.28) (-.75) (-1.32) (-.82) (-2.16) (-1.10) (-2.39) (-2.28) (-2.49) (-1.62)Yt-2 -.0229 .1180 -.0210 .1230 -.0084 .1598 -.0199 .0785 -.0206 .1287 (-.51) (1.81) (-.47) (1.89) (-.20) (2.36) (-.48) (1.26) (-.50) (1.94)Ht-1 -.0002 -.1068 .0000 -.1064 -.0238 -.1312 -.0170 -.0832 -.0173 -.1146 (-.01) (-2.44) (-.00) (-2.44) (-.85) (-2.86) (-.60) (-1.96) (-.62) (-2.54)Ht-2 .0419 -.0435 .0413 -.0450 .0493 -.0510 .0535 -.0216 .0525 -.0430 (1.46) (-1.05) (1.44) (-1.09) (1.86) (-1.17) (2.01) (-.54) (1.99) (-1.01)volat .0076 .0204 .0075 .0200 .0012 .0142 .0010 .0134 .0013 .0146 (4.67) (8.59) (4.57) (8.43) (.76) (5.65) (.68) (5.78) (.85) (5.91)Ft .0001 -.0001 .0001 -.0001 .0001 -.0002 .0001 -.0001 .0001 -.0002 (.49) (-.33) (.46) (-.37) (.45) (-.51) (.47) (-.47) (.47) (-.49)Xt-1 -.0000 .000284 .0000 .0003 -.0001 .0003 -.0001 .0003 -.0001 .0003 (-.24) (2.05) (-.19) (2.15) (-1.50) (2.13) (-1.59) (1.92) (-1.50) (2.19)Xt .0003 .0010 .0003 .0010 .0004 .0010 .0003 .0009 .0004 .0010

(3.86) (8.05) (3.62) (7.61) (4.32) (7.53) (4.07) (7.00) (4.25) (7.52)LOIm(-1) .0000 .0001 .0000 .0000 .0000 .0000 .0000 .0000 .0000 .0000

(.15) (1.85) (-.02) (1.52) (-.49) (1.08) (-.46) (1.34) (-.33) (1.37)LOIm .0000 .0001 .0000 .0001 .0000 .0001 .0000 .0001

(1.13) (2.04) (1.75) (2.24) (1.71) (2.22) (1.79) (2.32)Pt .5707 .4197 .5707 .4199 .5671 .4105

(13.28) (5.97) (13.32) (6.51) (13.30) (5.96)Pt -Ht-1 -.0170 -.1206

(-2.19) (-10.32) Pt -Yt-1 -.0230 -.0585

(-3.19) (-5.04)Adj. R2 .06 .25 .06 .26 .28 .28 .29 .39 .29 .31

Pt: central parity rate

Additional Analyses

Time-Varying Relationship

VECM(Yt, Ht) for different subsamples 09/30/2010 – 09/21/2011 09/22/2011 – 04/13/2012 04/14/2012 – 08/27/2013 ΔYt ΔHt ΔYt ΔHt ΔYt ΔHt

ECt-1 0.0040 0.069 -0.0939 0.3083 0.0100 0.1464 (0.30) (2.98) (-1.60) (2.95) (0.31) (3.71)

ΔYt-1 -0.1403 0.3250 -0.1295 -0.5949 -0.1448 0.1350 (-2.03) (2.70) (-1.36) (-3.50) (-2.08) (1.61)

ΔYt-2 -0.0407 0.0389 0.0078 0.16067 0.0245 0.0776 (-0.58) (0.32) (0.08) (0.92) (0.37) (0.96)

ΔHt-1 0.0363 -0.0743 -0.0535 0.0197 0.1555 -0.0534 (0.92) (-1.08) (-1.05) (0.22) (2.81) (-0.80)

ΔHt-2 0.0395 -0.0649 0.0490 -0.0574 -0.0677 -0.1813 (1.03) (-0.97) (0.97) (-0.63) (-1.26) (-2.80)

Constant -0.0002 -0.0001 -0.0001 -0.0001 -0.0001 -0.0001 (-2.63) (-1.05) (-0.88) (-0.66) (-2.03) (-1.72)

Adj. R2 -0.00 0.06 0.05 0.13 0.02 0.07

Granger causality test; p-values 09/30/2010 – 09/21/2011 09/22/2011 – 04/13/2012 04/14/2012 – 08/27/2013ΔH ≠› ΔY 0.439 0.315 0.002 ΔY ≠› ΔH 0.026 0.001 0.242

Rolling Estimates (moving window of 200 observations)

Forecasting Performance

Pt = + βWt-1 + t; Pt: central parity rate

ΔHt-1 ΔYt-1 ΔXt-1 RW RMSE 0.541 0.547 0.538 0.546

(0.84) (-0.27) (2.54) MAE 0.415 0.427 0.418 0.427 (2.56) (0.09) (2.77)

The trading band effect (?)

Pt = + β1Ht-1 + β2Xt-1 + t

Full sample: both significant

Rolling samples (moving window of 200 observations)

Concluding Remarks

Microstructure variables

CNH CNY Official central parity rate

CNH-CNY Long term and short term interactions Time varying CNH effect stronger over time Predicting the official central parity rate

CNH Order flow

Informational role of the offshore market