As Bullish Yuan Bets Pile Up, Jefferies FX Head Preaches Caution

(Bloomberg) -- Currency traders are the most bullish on the Chinese yuan in about eight years. Jefferies LLC warns that enthusiasm may be premature.

As “in-depth” U.S.-China trade negotiations wrapped up Wednesday on a positive note, one-month dollar-offshore yuan risk reversals -- a put-call barometer of positioning and sentiment -- fell to the lowest level since 2011. That indicates traders are favoring calls to hedge against further yuan gains as the currency touches its strongest since July in the spot market.

However, the market may be getting ahead of itself in plowing into bullish yuan wagers, according to Jefferies global foreign-exchange head Brad Bechtel.

“We’re not out of the woods yet on the China-U.S. trade talks, but in the mean time, the market’s getting a little more excited about it,” Bechtel said. “It might be premature, because you could get blindsided by a deterioration on the trade talks.”

The offshore yuan has strengthened 1.1 percent against the greenback this month, after sliding about 5 percent last year in one of Asia’s worst performances. Efforts by Chinese policy makers to cushion the impact of slowing economic growth have also fed yuan strength, Bechtel said.

The dollar-yuan pair slid 0.3 percent on Thursday to break through 6.8 for the first time since August. While Bechtel finds the optimism a bit early, he still says the pair could test its 200-day moving average at 6.7198.

“The market would probably reassess around that area.”

To contact the reporter on this story: Katherine Greifeld in New York at kgreifeld@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Mark Tannenbaum, Dave Liedtka

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