CME Introducing Chinese Yuan Futures

The CME made the Wall Street Journal today (although they are likely in there more than they are not), as they reported on the pending introduction of a Chinese Yuan contract to their offerings. As the article explains, the burgeoning foreign exchange trade makes this move a no-brainer of sorts, and could open the door to further expansion.

From our perspective, we would love to see some CTAs add Chinese Yuan futures to their portfolios. Managed futures is, in many ways, a systematic way of doing tactical asset allocation between differing sectors.  And unless you’ve been living under a rock for the past decade, it’s clear that China is no longer an emerging powerhouse- they’re going toe-to-toe with more traditional Western powers and moving sectors on their own at times. In that regard, having exposure to their currency in a portfolio seems to make a lot of sense to us.

Expanding the scope of the conversation, we’re really hoping that this could provide a longer-term boost to managed forex trading. We’ve aired our issues with forex trading several times over (see our guide to trading forex here), but most of the problem centers around the fact that this trading, contrary to the WSJ reporting, doesn’t happen on an exchange, per se, but via any number of banks. This can create differing performance per account, and a whole mess of problems for managers attempting to “port” their performance to new platforms to invest for new clients.

If the CME can start to gain some traction in the forex space, and more and more managers focus on foreign exchange futures instead of the cash market, we’re hoping there will be more and more “real” forex managers worth taking a look at.

Those familiar with futures trading might be shaking their heads at us right now, skeptical of the potential impact of a Chinese Yuan futures contract. What about the Brazilian Real, or any of the other currencies that have had futures contracts introduced? Shouldn’t that have caused this shift?

It’s a fair argument, but a couple of unique factors make this contract introduction especially meaningful. For one, the timing is right on the money. Forex trading has expanded at a break-neck pace over the past five years, and the CME is poised to capitalize on the trend, especially if the WSJ is correct in their prediction that the CME plans to keep expanding in this corner of the world. For two, as much potential value as we see in trading the Brazilian Real (assuming there’s enough volume to make it worth your while), Brazil’s economic sway is not quite as hefty as China’s.

Bottom line? The circumstances are ripe for this contract’s introduction. We’re saying yes to the Yuan. There’s no real way to tell whether or not this contract will see success, but we’re hoping it will.