Traders Ease Back on Short Yuan Bets to Gauge U.S.-China Dispute
(Bloomberg) -- Traders aren’t adding bearish options on the yuan as quickly as before, amid expectations China may take more steps to arrest the currency’s decline.
The notional value of new options betting the yuan will weaken past 7 per dollar dropped to the lowest in two months last week, according to data from Depository Trust & Clearing Corp. Bets are still coming at a faster pace than the few months before June though, when the currency started to slide as the trade dispute with the U.S. brewed. That’s left the value of outstanding contracts at $130 billion, around the highest in seven months.
The People’s Bank of China has tried to slow depreciation in the yuan, the weakest currency in Asia over the past three months with a more than 6 percent slide against the dollar. Steps taken include making it more expensive to short the currency and setting the daily yuan reference rate stronger than expected for all bar three days since the start of August. A recent spike in the yuan’s offshore funding costs, which rekindled memories of a dramatic government-engineered short squeeze in 2016, also helped stabilize sentiment.
“The PBOC will continue to use smoothing operations to sway market sentiment,” said Stephen Innes, head of trading for Asia Pacific at Oanda Corp. in Singapore. He’s shorting the currency but looking to cut positions if it slides past 6.9 per greenback. “Long dollar-yuan should offer a good hedge against an escalation of the trade war -- the most poignant retaliation would be for the PBOC to guide the yuan weaker.”
New yuan put options, which provide the right to sell the currency, with a strike price of 7 or weaker totaled $3.3 billion in the first week of September, according to Bloomberg calculations based on DTCC data. That’s about a quarter of August’s peak. The slower increase came after a sharp buildup since June, with the notional value of such outstanding contracts jumping nearly 70 percent within three months.
The Chinese currency weakened over that period amid concern the trade war would dent China’s economy and encourage the PBOC to ease monetary policy further to support growth. A selloff of assets in emerging markets such as Argentina and Turkey is also pressuring the yuan.
The PBOC’s measures to support the currency haven’t been as intense as those taken in late 2015 and 2016, when the offshore yuan’s interbank borrowing costs and deposit rates surged to record highs. The lack of meddling is “inviting speculative actions,” according to Mingze Wu, a Singapore-based foreign-exchange trader with INTL FCStone Global Payments.
The offshore yuan’s three-month risk reversal rose in all but three sessions in the past 13 days, reflecting weaker confidence about the currency in the options market, Bloomberg data showed. The offshore rate was little changed at 6.8457 per dollar as of 4:53 p.m. in Hong Kong on Friday.
China still has plenty of tools if it’s determined to slow the yuan’s descent, and that makes betting against the currency riskier. As such, offshore investors are favoring conservative option structures that have limited downside with more “realistic” strike prices, which is very different from a few years ago, Charles Feng, head of macro trading for Greater China at Standard Chartered Plc, said in an interview last month.
“Short-term funding costs in the overseas market will remain high, and the PBOC may set its fixings at stronger levels to defend the exchange rate,” said Gao Qi, a currency strategist at Scotiabank in Singapore. “The central bank will seek to slow the yuan’s drops rather than reverse expectations. I don’t think the currency will break 7 this year.”
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