Market Setup of the Day: Pairing the Chinese Yuan vs. The Indian Rupee

CNY / INR

Pairing the Chinese Yuan (CNY) with the Indian Rupee (INR) may create a trading opportunity where the CNY might potentially leverage a gain against the distressed Indian currency. The final days of 2016 and the early days of 2017 are relatively quiet throughout most markets. The news from China and the turmoil in India regarding their cash notes may materialize the trading scenario of leveraging strength vs. weakness.

The Chinese government has made a statement to the world that it will be removing some restrictions regarding foreign investment in banking, insurance, securities and futures market trading firms. This action will facilitate opening up the services sector, reports the country's state planner in a document released on Friday.

The National Development and Reform Commission (NDRC) is preparing to open foreign investment opportunities in manufacturing, rail transportation equipment, motorcycles, edible fats and oils, and ethanol. The NDRC  has also said China is making plans to lift restrictions on foreign investment in unconventional oil and gas production, which may be referring to investments in shale operations. These actions may also give strength to the CNY as it becomes more foreign investment friendly.

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In India, Prime Minister Modi’s surprise declaration on November 8th to withdraw 86 percent of the outstanding banknotes in circulation has reduced the demand for goods and services throughout India.

The Reserve Bank of India has been severely criticized as to how and why the government chose to handle the cash dilemma in this way. The chaos that has resulted from their action is unprecedented in modern history.  It has been 50 days since the declaration and there is still a severe shortage of cash in circulation. Cash transactions are the norm, and the general population doesn't trust banks with their savings. Now ATMs are regularly running out of money and a 2,500 rupee per day cap on ATM withdrawals has been put in place.

This confusion as India becomes the 1st nation to actually be a cashless society, for however long this period of time may be, has the potential to create the weakness in the currency we seek to exploit when pairing the CNY with INR.