Swiss franc crisis reloaded?

Dukascopy Highlights Trading USD/CNH Pair Carries Negative Balance Risks

Swiss brokerage Dukascopy has announced that it is limiting the trading leverage it provides on the Chinese yuan to 1:10

Swiss brokerage Dukascopy has announced that it is limiting the availability of leverage to its clients that are trading the USD/CNH currency pair. The maximum amount of leverage which clients of the Swiss brokerage are going to be able to use is 1:10. The news comes almost a year after the notoriously infamous collapse of the Swiss franc peg.

While it may not seem apparent, the underlying fundamentals of the Chinese yuan are somewhat similar to the Swiss franc in January 2015. The Chinese central bank has been facing increased pressure to float the Chinese yuan exchange rate. Currently the USD/CNH currency pair, which is representing the offshore rate of the Renminbi, is largely a managed float.

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Dukascopy highlighted in its announcement that high volatility and the probability of low liquidity on USD/CNH currency pair could result in significant price gaps, which may cause negative equity on client accounts.

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The changes are affecting clients of both Dukascopy Bank and Dukascopy Europe from the 15th of January 2016 at 11:00 GMT.

USD/CNH, Dukascopy
Daily chart of USD/CNH, Source: NetDania

While some analysts have been vocal about the Central Bank of China being forced to float the Renminbi exchange rate sooner or later, for now this move remains outside of the radar of central authorities in Beijing.

With the announcement coming merely a year after the Swiss franc peg collapsed, this approach by Dukascopy is highlighting the additional risks that traders are assuming when trading currency pegs. While the Chinese yuan rate is a managed float, the government is in tight control of the direction of the market.

With increasing capital outflows, the Renminbi’s rate could be free floated in the near future, resulting in substantial volatility on the currency markets. The move by Dukascopy mimics the moves of some brokers last year that have increased margin requirements on currency pairs including the Swiss franc months before the black swan event on January 15th 2015.

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