I usually read statements as the below:
"Bank A recommends long positions in the yuan against the Singapore dollar"
How are these trades usually implemented? Borrow SGD and convert into CNY (FX spot) or through derivatives (eg FX forwards/swaps)?
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2 Answers
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Adding some details:
CNY is problematic because it is a nonconvertible currency (that is why user42108 suggests using the offshore yuan CNH instead, or a nondeliverable forward on CNY).
See this post Spot/Next and Tom/Next FX forward swaps for more detail about T/N Swaps and how they can be used to postpone delivery of a spot transaction by 1 day (effectively keeping the position open as long as you like) while paying/receiving an interest rate differential. This is how much FX speculative trading is done. Effectively you are borrowing one currency and lending the other, but indirectly via the FX market.
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$\begingroup$ can you share a numerical example on how T/N swaps are used to roll spot positions? For example if you go long EURUSD (we use deliverable ccys for sake of simplicity). thanks $\endgroup$– StudentCommented Apr 26, 2021 at 16:47
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SGDCNH spot+swap or SGDCNY NDF.
