Dollar-yuan trading may jump, following Australian example

New Zealand can expect exponential growth in foreign exchange trading with China after the two countries agreed to direct trading of their currencies, according to HSBC Bank, which will be involved in trading the currency pair.

The agreement means the New Zealand dollar can now be directly converted to the Chinese yuan, instead of having to use the US dollar, the world's most-traded currency, as an intermediary. When Australia made a similar agreement with China last April, its currency trading with the yuan surged from US$300 million in March to US$2.5 billion in January, HSBC said.

"We can't ascertain what that number is going to look like in New Zealand but what we do know is it will take a similar track. It does grow quite dramatically," said Gerard Field, head of global markets at HSBC New Zealand. "I would expect the same track. This will just be exponential."

For New Zealand, the currency deal reflects a strengthening relationship with China, which is now our largest trading partner following a 2008 Free Trade Agreement and is a major source of migrants, students and tourists. The kiwi is the sixth currency China has approved for direct trading as it seeks to raise the global usage of its currency. The yuan in October overtook the euro to become the second-most widely used currency in global trade finance, behind the US dollar.

The agreement "will make cross border flows that much easier into the future," said HSBC's Field. "You get direct convertibility, you get more liquidity, you get more flow in the currencies, so by doing that it makes it easier to transact in those currencies."

The New Zealand dollar rose as high as 5.3495 yuan, an 11-month high and recently traded at 5.3373 yuan.

New Zealand commodity exports of dairy, meat, fish and logs are being underpinned by China as Asia's largest economy grows at a 7.5 percent annual pace, boosting incomes and spurring demand.

"In the future the importance of China just continues to grow to New Zealand," Field said. "This really opens up the trade flows. We are delivering the soft commodities and the high quality goods that China wants. We are well placed to grow off the back of China's growth."

HSBC, ANZ Bank and Westpac Banking Corp. are among banks to receive approval from China's central bank to act as market makers for the currency pair.

The direct trade of the currencies is expected to cut down on transaction costs, with each transaction of $100,000 having the potential to save several hundred dollars, Westpac said.

China has previously agreed direct trading with the US dollar, the Japanese yen, the Australian dollar, the Russian rouble and the Malaysian ringgit.

In a move aimed at allowing market forces a greater role in determining its exchange rate, China this week doubled the yuan's trading band against the US dollar to 2 percent on either side of a daily reference rate set by the central bank.

(BusinessDesk)

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