Traders Accumulate Bearish Yuan Wagers on Low Costs, Fed Outlook

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Is Monetary Policy in China Working?
  • Currency’s risk reversal increases from an almost two-year low
  • Such bets aren’t wise as PBOC can support rate, analyst says

Options traders are adding to bearish wagers on the yuan after the cost of betting against the Chinese currency fell to an almost two-year low.

QuickTake The People’s Currency

The extra cost that investors pay for three-month options to sell the yuan in Hong Kong against the dollar over contracts to buy has risen in 11 of the past 12 sessions. The price difference was just shy of 1 percent on Tuesday, after it dropped to a low of 0.53 percent on Aug. 1 amid optimism policy makers will stabilize the yuan before a Group of 20 meeting in Hangzhou next month.

Investors are seeing a higher probability of the Federal Reserve raising interest rates in 2016, with officials signaling that an increase is still possible this year. China’s recent economic stabilization faltered in July, when exports, industrial production and retail sales fell short of economists’ predictions and the broadest measure of new credit grew at the slowest pace in two years.

“The bears are betting against the yuan because the current costs are low, China’s fundamentals are weak and the Fed could be preparing to boost interest rates,” said Ken Cheung, a foreign-exchange strategist at Mizuho Bank Ltd. in Hong Kong. “I don’t think it’s wise to trade against the People’s Bank of China at this moment as it has effective measures to defend the yuan and it won’t allow rapid outflows.”

Fed Vice Chairman Stanley Fischer said over the weekend that the U.S. economy is close to meeting the central bank’s goals and that growth will pick up. The remarks came after San Francisco Fed President John Williams said on Friday that a September move is still “in play.” The focus is now on Fed Chair Janet Yellen’s speech this week in Jackson Hole, Wyoming, where top global central bankers will gather to discuss policy.

A net $55 billion left China in July, compared with $49 billion in the previous month, Goldman Sachs Group Inc. analysts wrote in a note last week, adding that their preferred gauge shows that cross-border yuan outflows continue to be large. With outflows surging to an estimated $1 trillion in 2015, China has stepped up scrutiny of cross-border transactions and frozen quotas for a program facilitating individuals’ overseas investment through institutions.

The onshore yuan strengthened 0.16 percent to 6.6420 a dollar as of 4:50 p.m., as a gauge of the dollar’s strength fell. The offshore currency rose 0.10 percent. A Bloomberg replica of the CFETS RMB Index, which tracks the yuan against 13 peers, was little changed at 93.9.

— With assistance by Tian Chen

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