Yuan Options Bets Reveal Jitters Over China Stimulus Impact

(Bloomberg) -- Market euphoria around China’s stimulus blitz is at risk of sputtering sooner rather than later, if yuan option wagers are any guide.

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The volume of dollar-yuan trading surged last week in the $300 billion-plus foreign-exchange options market, according to Bank of America and Citigroup Inc. Traders have been betting on an appreciation of China’s currency over the coming month — but beyond that short-term move, the outlook is far less certain.

“In the longer term beyond the US election, we continue to see broader structural interest for dollar calls, which is suggesting the investor community still has concerns about fundamental drivers of the dollar-yuan exchange rate,” said Ivan Stamenovic, head of Asia Pacific G10 FX trading at Bank of America.

The shifting view of options traders add another data point to questions about the lasting impact of a series of stimulus announcements from Chinese officials last week, which sent stock prices soaring and fueled a wave of yuan trading in the derivatives market.

Yuan option trading volumes jumped 42% above their five-day average on Sept. 25 in reaction to the measures, shows data compiled by Blooomberg. But signs of exhaustion are already emerging.

The premium to hedge the depreciation of the dollar against the offshore yuan over the next month, compared with its upside, has fallen by more than 80% since September 26, as the initial stimulus euphoria fades. Yuan option trading volume on the Depository Trust and Clearing Corporation has also tailed off, ending last week 16% below its five day average.

“We saw demand for shorter dated dollar puts, which impacted the skew aggressively,” says Nathan Swami, Singapore-based head of FX trading for Asia Pacific at Citigroup Inc. “However, this seems to be transient for now.”

A major worry for options traders is the US election in November, when a Donald Trump win could lead to a resumption of the tit-for-tat trade war between the world’s two largest economies.

The options trades, which involve China’s offshore currency, reflect sentiment among foreign investors rather than those inside the country. Since China’s stock and bond markets are dominated by domestic accounts, rising skepticism from foreign traders doesn’t necessarily herald a coming selloff. But the trades show that initial euphoria around China’s stimulus blitz, at least in some markets, has made way for doubts.

The spot currency market is also reflecting a shift in sentiment among foreign investors. The dollar is trading back above 7.0 against the offshore yuan, just days after breaching what is seen as a key psychological level.

“We saw clients sell dollar-yuan initially unwinding previous long dollar positions,” says Yakeen Mirchandani, London-based head of EM FX trading EEMEA at Nomura Holdings Inc. “There is still uncertainty ahead of the US elections and market is not fully on board the bullish China sentiment with a risk of Trump presidency still there.”

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