Since the year 2000, daily trading (buying or selling) of Chinese Yuan has increased over 500%. This spike in volume can be attributed to two closely related factors. First, as China becomes more prominent in the global economy, foreign currency must be exchanged for Yuan in order to complete transactions in which one of the parties is Chinese. Second, speculators have been buying up large quantities of Yuan, anticipating a near-term appreciation.

Contrary to popular belief, the Yuan is allowed to fluctuate on a daily basis. However, this fluctuation is tightly controlled within a band set by the Chinese Central Bank, and is thus rendered irrelevant. Many investors believe the Central Bank will soon expand the band, leading to the Yuan’s eventual appreciation against the Dollar. Forward-rate agreements, which allow investors to exchange dollars for yuan at a fixed date in the future, reflect investor expectations of future exchange rates. In this case, the price of the forwards indicate that investors expect the yuan to appreciate against the dollar within the next couple of years.

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