Yuan Options Most Bearish in Asia as Traders Ready to Fight PBOC

  • Premium for right to sell yuan surged more than 50% in January
  • Market paying less heed to controls imposed by China: Barclays

Would Devaluation Help or Hurt Yuan?

Traders are paying more to bet on a yuan decline with options than they do for any other Asian currency, suggesting bears are regrouping after being thwarted by the central bank last month.

The extra cost for three-month options to sell the yuan against the dollar in the Hong Kong market over contracts to buy jumped in January by the most since 2011, approaching the record seen after its Aug. 11 devaluation. The value of contracts carrying the right to sell the yuan at or beyond 7 per dollar -- about 5 percent weaker than the current spot rate -- has surged more than 60 percent this year.

“This shows options traders are paying less heed to the controls the Chinese authorities have implemented and that they think the yuan still has a long way to go in terms of depreciation,” said Mitul Kotecha, head of Asian foreign-exchange and interest-rate strategy at Barclays Plc in Singapore.

While the People’s Bank of China has sold dollars, driven up yuan interest rates and issued verbal warnings to deter speculators, hedge funds aren’t budging from their view that a weaker currency is unavoidable. The nation’s economy is growing at the slowest pace since 1990, an estimated $1 trillion in capital flowed out last year and stock markets in Shanghai and Shenzhen are in the midst of a renewed sell-off.

Yuan Sentiment Most Bearish in Asia

The extra cost for options to sell the offshore yuan over contracts to buy was the most bearish among 11 Asian currencies on Wednesday, three-month risk-reversal prices show. The premium rose to an unprecedented 4.6 percent in August and the offshore yuan has plunged 6.5 percent since then to around 6.63 a dollar. In Shanghai, the currency has declined 5.6 percent.

The notional value of outstanding put options, contracts that provide the right to sell the currency, at 7 a dollar or weaker has jumped to $223 billion from $137 billion at the end of December, Depository Trust & Clearing Corp. data show.

Even as bearish bets build in the options market, most analysts aren’t expecting a steep decline. Just two of 45 in a Bloomberg survey predict a slide beyond 7 a dollar this year, with the median estimate seeing the currency ending 2016 at 6.76.

Hedge-fund managers including Mark Hart of Corriente Advisors are using put options to bet against the yuan. Hart said last month that China should weaken its currency by more than 50 percent this year, while Crispin Odey at Odey Asset Management said in September that the yuan should fall by at least 30 percent. Carlyle Group’s Emerging Sovereign Group and Kyle Bass’s Hayman Capital Management are also positioned for a retreat in the currency.

Short-sellers drew scorn from China, whose state-run Xinhua News Agency said that they “haven’t done their homework,” while a Chinese official said bets against the currency will fail. Authorities can keep the exchange rate basically stable against a basket of currencies because the nation has ample foreign-exchange reserves and a solid financial system, the China Foreign Exchange Trade System said in a statement posted on its website.

“What the Chinese are doing is working less and less, and that’s why people are banking more and more on a big increase in the dollar-yuan rate,” said Nordine Naam, global macro strategist at Natixis SA in Paris.

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