Trading a Chinese Dollar Sale

The Chinese yuan (also known as the renminbi) is a fixed currency that is allowed to trade within a band selected by the People's Bank of China (PBoC). The PBoC chooses a midpoint and allows the currency to float within 0.5 percent of that peg on each side. However, recent weakness in the Chinese economy has caused the yuan to weaken against currencies such as the U.S. dollar, with the USD/CNY recently rising to 6.3572.

The current midpoint set by the PBoC is 6.3190, meaning that the upper end of the band is 0.5 percent above this, or is 6.3506. The current price is 66 pips above the current upper limit, a significant premium, and may force the PBoC to intervene. Due to the dollar strength of this pair, the PBOC may be forced to sell dollars to push the pair back into the trading range.

For traders in the U.S., trading the USD/CNY pair may be difficult, as it is rather illiquid. However, if the PBOC is forced to sell large quantities of dollars in the open market, it could have knock-on effects onto other dollar crosses, a move which traders could capitalize on. If the PBoC's dollar sales cause the dollar index to fall, other pairs might fall with it.

Other pairs that could benefit from Chinese intervention include the AUD/USD, the EUR/USD, and the GBP/USD.

The euro makes up 57.6 percent of the dollar index, so broad dollar weakness could be reflected in this pair. The British pound sterling makes up a large portion of the index (11.9 percent), so this pair would likely move as well. Additionally, the AUD/USD moves with risk sentiment and is approximately -75 percent correlated to the dollar index.

(c) 2013 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.