Offshore Yuan Traders Gain on PBOC’s Volatility Push

Traders in Hong Kong are benefiting as China’s moves to curb one-way appreciation bets on the yuan drives up offshore foreign-exchange trading, and Standard Chartered Plc expects 30 percent growth in turnover this year.

The average daily volume in the spot, forwards and swaps markets is now more than $20 billion, according to Kenneth Lau, Hong Kong-based head of rates trading at Standard Chartered. Trading has increased by 5 percent to 10 percent after the People’s Bank of China doubled the onshore currency’s trading band to 2 percent in March. Bank of America Merrill Lynch estimates average turnover has increased to as much as $25 billion a day from $15 billion.

“We probably have less buying flows on the yuan, but at the same time, we have more people hedging the risks of the strengthening of the dollar,” Lau said in a May 30 briefing in Hong Kong. “We are quite confident that this year we still will have more than 30 percent annual growth in terms of foreign-exchange trading volume.”

The onshore yuan has lost 3.1 percent against the dollar in 2014, the worst performance in Asia, on China’s economic slowdown and speculation that the central bank is seeking to squash market expectations that it will only gain. The currency traded in Hong Kong has also declined 3.1 percent.

The yuan will end this year at 6.12 per dollar, implying a 1.1 percent drop from the end of December, according to the median estimate in a Bloomberg News survey. The currency gained 0.01 percent to 6.2466 as of 10:21 a.m. in Shanghai. The spot rate gained 2.9 percent in 2013.

Six-month implied volatility in the onshore yuan, a gauge of expected moves in the exchange rate used to price options, was at 2.2 percent today, above an average of 1.91 percent in 2013, according to data compiled by Bloomberg.

“We no longer have one-side bets or a one-side view and, on top of that, we have the 2 percent band widening this year,” said Lau. “Clearly, the need for corporates to focus on their hedging needs and to understand the different hedging instruments offered to them has increased.”

Before it's here, it's on the Bloomberg Terminal.