Yuan Options Most Bearish Since June as Traders See Sharper Drop

  • China’s currency is down 3.6% this quarter against the dollar
  • Goldman Sachs says shorting yuan is favored trade in 2017

Traders are paying more to bet on a yuan decline with options as the currency slumps to an eight-year low amid the dollar’s ascent.

The extra cost for options to sell the yuan against the dollar over contracts to buy reached 1.88 percent in Hong Kong on Wednesday, three-month risk-reversal prices show. That’s the highest since June 30, and more than double the level reached before Donald Trump’s victory this month.

The offshore yuan may slide to 7 per dollar in the near term as the greenback rallies, while low offshore funding costs may encourage investors to add short positions, according to a note by Commonwealth Bank of Australia. Goldman Sachs Group Inc. last week said betting against the yuan as one of its favorite trades for next year. The currency has slumped 3.6 percent against the greenback this quarter.

"Investors are re-positioning their trades to protect themselves from accelerated depreciation, as they figured that the Chinese government actually may not have a bottom line for the yuan’s drop," said Zhou Hao, economist at Commerzbank AG in Singapore. "Bearish bets on the yuan will continue to rise as the market is still pessimistic, but we won’t likely see the same kind of panic in January because policy makers will control the pace of depreciation."

A quick build-up of short yuan trades could send the currency into a vicious cycle of sharper depreciation and quicker fund outflows. The People’s Bank of China has been seen taking action to slow the yuan’s quick slide this month with stronger-than-expected fixings and intervention in the past week. The offshore yuan’s three-month risk reversal was at 1.84 percent as of 4:45 p.m. local time, according to data complied by Bloomberg. The currency in Shanghai weakened by 0.10 percent to 6.8986 per dollar, while the offshore rate dropped 0.2 percent.

— With assistance by Tian Chen

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