Yuan Bearish Bets Wane to 2014 Low as PBOC Seen Tightening Grip

  • No reason to aggressively wager against currency, DBS says
  • Central bank raises daily reference rate by most since June 23

Options traders are the least bearish on the yuan in two years amid speculation China’s leaders are looking to stabilize the currency and that any weakening will be gradual.

The extra cost for three-month options to sell the yuan against the dollar in the Hong Kong market over contracts to buy was near the lowest level since September 2014. The paring of depreciation bets follows increasing signs that the authorities will fight excessive declines, with the central bank suspected of defending key levels and a senior official saying the nation is “working hard” for stability against a basket of currencies.

The People’s Bank of China fueled speculation that it was supporting the yuan last month, setting a series of stronger reference rates after the currency weakened beyond 6.7 a dollar for the first time since 2010. A gauge of the greenback’s strength has dropped 1.7 percent in the past two weeks, making it easier for the PBOC to steady the yuan as the nation prepares to host a Group of 20 summit in the eastern city of Hangzhou in September and ahead of the currency’s entry into the International Monetary Fund’s reserves in October.

“There’s no ground to really go aggressive to push the yuan much weaker, and there’s little interest from short-sellers to do that," said Tommy Ong, managing director for treasury and markets at DBS Hong Kong Ltd. "The yuan will be kept stable. The PBOC will likely defend 6.7 a dollar like it did last month, and the dollar will probably remain weak throughout the year as the likelihood for the Fed raising rates is waning."

Receding Pessimism

The premium to sell the yuan over contracts to buy was at 0.6 percent in Hong Kong on Wednesday, three-month risk-reversal prices show. That’s near Monday’s close of 0.57, the lowest since Sept. 11, 2014, and down from this year’s high of 4.6 percent in February.

The Chinese currency was little changed at 6.6308 a dollar as of 4:35 p.m. in Shanghai, according to China Foreign Exchange Trade System prices, and down 0.05 percent in Hong Kong. A Bloomberg replica of the trade-weighted CFETS RMB Index, which tracks the yuan against 13 currencies, fell for a third day. The central bank raised its fixing for the yuan by 0.39 percent, the most since June 23.

In the money markets, the seven-day repurchase rate, a gauge of interbank funding availability, rose two basis points to 2.28 percent, weighted average prices from the National Interbank Funding Center show. The PBOC has used its open-market operations to drain 151.5 billion yuan ($22.9 billion) from the financial system so far this week, data compiled by Bloomberg show.

— With assistance by Tian Chen, and Helen Sun

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