Hedge funds are ramping up options wagers, signalling that the Chinese yuan’s rally against the US dollar still has room to run.
Their demand for options that become profitable if the yuan rises against the dollar has increased, according to traders who asked not to be identified. Investors are now targeting a yuan at around 7 or stronger by the end of the year, SGX Derivatives Exchange data showed, on rising confidence in China providing policy support and shifting US interest rate expectations.
“We have seen a pickup in demand for downside for dollar-offshore yuan, mainly from hedge fund clients,” said Saurabh Tandon, global head of foreign-exchange options at Standard Chartered Bank in Singapore. The pair’s implied volatility, especially in nearer-dated contracts, had declined due to low realised volatility over the last few months “and that’s making buying downside options an attractive trade”.
The increase in demand for bearish dollar-offshore yuan bets comes as the People’s Bank of China raised its daily reference rate for the yuan by the most in nearly a year last week. Meanwhile, the dollar is under pressure amid growing market expectations that the US Federal Reserve will resume cutting rates next month after a recent speech from chair Jerome Powell.
What’s more, investor sentiment towards Chinese assets appears to be improving due to factors including supportive fiscal policy and “benign progress” in trade talks between the US and China, said Jingyang Chen, Asian FX Strategist at HSBC Global Investment Research, in a client note on Friday.
On August 28, the most heavily traded dollar-yuan option expiring in December was a put that had a strike of 6.94, according to options trades executed on the SGX Derivatives Exchange. That means the buyer of this option can sell the dollars for yuan at 6.94. The put option gains in value if the currency pair falls below this level. The dollar-offshore yuan was trading at around 7.1274 as of 12.30pm Hong Kong time on Monday.