China’s Unfazed Yuan Traders Bet Tariffs Won’t Be Hiked
China’s Unfazed Yuan Traders Bet Tariffs Won’t Be Hiked
(Bloomberg) -- China yuan traders are undaunted by Sunday’s looming start of fresh U.S. tariffs even as investors elsewhere are piling into protection.
As President Donald Trump’s Dec. 15 deadline for more duties on Chinese imports draws closer, one-week risk reversals -- a measure of demand for bearish yuan bets relative to bullish calls in the options market -- have been at their lowest since July. And while volatility gauges for the currency have jumped in the past week, they remain well below levels reached in August, when the yuan weakened through 7 per dollar for the first time since 2008 amid trade worries.
An unusual sense of tranquility has descended on China’s financial markets the past month, in part on investors awaiting clearer insight on the state of the U.S.-China trade fight amid a near-daily dose of headlines.
While the offshore yuan weakened slightly Wednesday after White House trade adviser Peter Navarro said he has “no indication” whether the looming tariffs will be implemented as scheduled, market sentiment was supported by people familiar with the discussions saying that Chinese officials expect the duties to be delayed.
Yuan traders anticipate the same, said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd. in Singapore. “Volatility spikes have been nothing out of the ordinary and the spot market is still calm,” he added. “I guess all the headlines about how both sides are really close to a deal have given them some comfort.”
Some Chinese banks have chosen to reduce their long and short dollar positions ahead of the tariff deadline, according to three traders. Most firms have reached their year-end performance targets, so there’s no need to take fresh risk at this time, the traders added, asking not to be named as they’re not authorized to speak with the media.
Amid the trade uncertainty in recent days, one-week volatility in both the onshore and offshore yuan is back to October levels. But “volatility is rising from a very low place,” said Stephen Innes, chief Asia market strategist at AxiTrader Ltd. “It’s cheap relative to the risks that lie ahead.”
The yuan has traded in a roughly 1% range the past month, sticking close to the 7 per dollar level. Citigroup Inc. told its clients last week that while it doubted new tariffs will be enacted Dec. 15, the yuan could weaken to 7.2 to 7.35 per dollar in offshore trading if the levies get priced into the market.
The currency was around 7.0320 at 3:45 p.m. in Shanghai, the yuan weakening slightly after a Ministry of Commerce spokesman provided no trade-talk update during a regular afternoon briefing beyond saying teams remain in close touch.
Meanwhile, the volatility spread between the onshore and offshore yuan has widened to the most since October. That’s largely on dwindling mainland trading momentum ahead of year-end, said Frank Zhang, deputy general manager for global markets at Bank of Hangzhou Co.
--With assistance from Ran Li.
To contact Bloomberg News staff for this story: Livia Yap in Shanghai at lyap14@bloomberg.net;Qizi Sun in Beijing at qsun62@bloomberg.net
To contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, Kevin Kingsbury, Fran Wang
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With assistance from Bloomberg