Breaking Down Bitcoin / CNY

Figure 1.

Short CNY and long Bitcoin has been a good trade over the past 18 months. As seen in Figure 2 below, the Chinese currency has depreciated to a 6-year low of 6.68087 against the US Dollar, with CNH (the offshore freely traded version) trading at levels of 6.6833. The premium between XBT/CNY and XBT/USD is trading relatively weak however, currently pricing at a small discount as seen in Figure 1 above. With analysts predicting further devaluation in the Yuan, we are on course to see a continuation of this bullish trend in Bitcoin and a pick-up in the premium.

Figure 2.

CLSA, a brokerage and investment group known for their Asian research, predicted back in April that the CNY will head towards 8.00 by the end of next year. More recently, a Reuters Poll conducted in late August of over 60 FX strategists showed a more conservative, yet still bearish case, that the CNY is expected to depreciate to 6.80 by the end of February and by the end of August 2017 further weakness to 6.89.

As the chances of the Fed raising rates increase, and once they eventually do raise rates (whether before or after the election), the USD will strengthen (as it has been recently). This makes it harder for China to keep the currency pegged to the greenback as they need to sell their reserves to support the Yuan. Further depletion will prompt China to adopt a free-float regime which could cause immediate selling in the Yuan, as traders are free to price their views on the impending issues in China such as the much-anticipated debt bubble.

As Chinese become more and more concerned about the value of their local assets they will continue to look for ways to convert into another currency or asset. One method the Chinese have used is known as the EB-5 Immigrant Investor Program, allowing foreign investors to obtain a US green card and investing in the US at their will, by first investing in specific US based projects (predominantly real estate projects such as apartment complexes and shopping malls). This method has taken a hit over the years given the restriction on capital flows out of China. In fact I have had several US firms approach me enquiring about Bitcoin as a “legal” method for moving funds out and into their programs. However, at high premium above 3% this approach becomes unattractive for these firms.

The current cheap premium entwined with the impending rate rise may be the trigger to spur another round of purchasing by the Chinese, pushing the premium and bitcoin up with it.