Hedge funds and other speculators are losing big in a bruising battle with Chinese regulators over the renminbi.
Seven months after a shock devaluation spurred them to wager on further declines, the yuan’s unexpected resilience has turned many of those bets into losses, Bloomberg reports.
At least US$562 million of options that pay out if the currency drops below 6.6 per dollar — its weakest point since the devaluation — have expired worthless since August.
Another US$807 million will lapse within three months.
The Chinese government has proven a stronger adversary than many traders anticipated.
Policymakers have gone to extreme lengths to prop up the yuan — ramping up intervention, clamping down on capital outflows and waging a rare verbal campaign to restore confidence in the currency.
“China wants to have control over the yuan and will do whatever it can to ensure that no one else decides what direction it goes in,” said Hilmi Unver, head of alternative investments at Notz Stucki & Cie, a Swiss money manager that allocates US$3 billion to hedge funds on behalf of clients.
“Is it worth fighting against a huge economy and policy maker that could take you out? No.”
State-run banks have repeatedly intervened to prop up the yuan since August while authorities have suspended quotas for outbound investment and restricted overseas debit-card transactions to limit capital outflows.
People’s Bank of China governor Zhou Xiaochuan has joined a slew of top policymakers to talk up the currency, saying over the weekend that the yuan has returned to a more “normal, rational and fundamentals-driven” trend.
After the worst start to a year in two decades, the yuan has strengthened 1.6 percent since Jan. 7.
It traded at 6.493 per dollar on Friday, the strongest close of 2016, according to China Foreign Exchange Trade System prices.
That wasn’t what bears were expecting.
One gauge of investor pessimism in the options market — the three-month risk reversal — climbed to its highest level since 2009 last month, while the yuan’s implied volatility, which tends to rise when traders expect bigger price swings, jumped more than fivefold from August through Feb. 3.
Betting against the Chinese currency became such a popular trade among hedge funds earlier this year that billionaire investor Bill Gross compared it to the speculative attack on Britain’s pound in 1992.
Some of the industry’s biggest names, including Kyle Bass of Hayman Capital Management and Crispin Odey of Odey Asset Management, have said they’re wagering on another big drop.
It’s difficult to gauge how yuan speculators have fared since the August devaluation.
Depository Trust & Clearing Corp. data reveal the value of premiums paid for call options on the dollar-yuan rate (contracts that benefit from yuan weakness) but observers can’t know for sure whether the instigators of those trades were bearish or bullish.
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