Singapore: Hedge funds are ramping up options wagers signalling that the 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 US dollar has increased, according to traders who asked not to be identified.
Investors are now targeting a yuan around seven or stronger by year-end, 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 US 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 US 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 US dollar is under pressure amid growing market expectations that the US Federal Reserve will resume cutting rates next month after chairman Jerome Powell’s Jackson Hole speech.
What’s more, investor sentiment toward Chinese assets appears to be improving due to factors including supportive fiscal policy and “benign progress” in trade talks between the United States and China, said Jingyang Chen, Asian foreign exchange strategist at HSBC Global Investment Research, in a client note.
“We have seen increased downside interest from clients on US dollar/yuan recently,” said Dhaval Shah, managing director of currencies and emerging market sales at JPMorgan Chase & Co in Singapore. “The expression has been a mix of cash and options”
Despite the yuan reaching its strongest level in nearly 10 months last week, the premium to hedge against it falling versus rising over the next month remains well below this year’s high.
“We saw fresh interest for down-strikes but buying remains tactical and measured,” said Ivan Stamenovic, Hong Kong-based head of Asia Pacific G10 foreign exchange trading at Bank of America Corp.
Onshore Chinese market data released last Friday shows monthly volume of foreign exchange options, which consists of both retail and interbank trading, rose to US$227.8bil in July, the highest since the State Administration of Foreign Exchange started publishing the data in 2015.
Some exporters were selling US dollar-yuan calls to increase returns from foreign exchange assets in recent months when yuan volatility dropped. — Bloomberg