The greatest trick the Devil ever pulled was convincing the world he didn't exist

"The greatest trick the Devil ever pulled was convincing the world he didn't exist."

                 - Verbal Kint, The Usual Suspects

Many readers will by now have seen the Bloomberg story trumpeting the demise of the CNY short...or at least what looks to be quite a lot of expensive options expiring worthless.  On a seemingly daily basis, meanwhile, we are treated to commentary suggesting that a stable to lower USD/RMB implies that the Chinese authorities are holding firm by preventing a further depreciation.

At the risk of repeating himself, Macro Man has to tip his cap to the Chinese authorities for an absolutely superb sales job...certainly a better one than those conducted by certain poorly performing fund managers who pimped their CNY views on TV.  For not only has the RMB not been gaining ground over the past couple of months...it's actively been depreciating against the policy basket that the Chinese now seem to care about.

Keyser Soze would be proud.   Needless to say, the street has been long the chart on top rather than short the chart on the bottom.  That, my friends, is how articles like the one linked above get written.
Or is it?  What's the true cost of being short the RMB against its 13-constituent basket?  Macro Man decided to investigate.

His first port of call was to create an index using tradable currencies; after all, no one can transact at the CNY fixing rates on CFETS, especially when they deviate notably from market rates (as has often been the case.)  Macro Man used USD/CNH as a proxy for the USD/CNY fixing, and calculated rates for the other dozen basket members by using their USD crosses.   As you can see, his tradable spot basket matches up pretty closely with his CFETS fixing basket (which itself follows the official basket.)

Ah, but what about the carry?   While it's true that the CFETS basket contains ultra-yielders like the RUB, it's equally the case that there is a hell of a lot more weight given to low-yielders (USD, EUR, JPY, and HKD account for nearly 70% of the basket.)   If you want to be short CNH and long all of that stuff, it's going to cost you.   How much depends on what part of the curve you choose to fund at;  Macro Man used 3 month forwards and calculated the implied daily carry from them.   The picture above looks rather different when you include the cost of holding the position.

Obviously, on an individual trade level the picture can look a bit different, particularly if you're astute at locking in attractive funding levels.   By the same token, it could also look a lot worse- recall that three month implied CNH rates were over 10% in January, and overnight rates hit 65%!  Nevertheless, it should be clear that the true profitability of a CNY or CNY position can be a lot different from what you see on a spot or index chart.  That's particularly the case when you consider that none of the charts above include transactions costs; please rest assured that they are pretty clearly not zero in real life.

At the end of the day, perhaps that's why punters keep returning to the simplicity of USD/CNH or USD/CNY.  While those trades were profitable during the volatility of August and January, they actually look pretty poor as a buy-and-hold proposition.  Believe it or not, on this calculation holding long USD/CNH since the beginning of 2015 is now a loser.

If we look at the relative performance of the CNH versus both the basket and the USD since the introduction of the former, the poor performance of the USD/CNH trade is even starker.  (Again, your mileage may vary slightly depending on funding levels, but most of the disparity below is down to spot movement, not funding.)

None of this even accounts for the cost of implied volatility (hint: CNY and CNH puts don't come cheap) and option decay which is a popular implementation method for the trade.   The numbers cited by Bloomberg for premium gone down the pan are pretty staggering, as is the outstanding face amount of USD calls (some $550 billion.)

The moral of the story is that the RMB trade is not a sell-and-hold proposition, regardless of what the purveyors of fanciful wishcasts might tell you.  If there were ever a market that called out for hit-and-run, tactical macro, this is it.  There's money to be made in the China trade..but when you see it, ignore the stars in your eyes and take some off the table.

Because the Chinese appear to be having their cake and eating it too.   The stability in USD/RMB has got the West off their backs (for the time being.)   The depreciating RMB versus the basket is achieving their actual policy goal.   And the prohibitive cost of being short RMB means that even with the depreciation, most Western specs cannot make money!

Forget Keyser Soze; the Chinese are pulling the greatest trick of dissimulation you've ever seen.