(Bloomberg) — In a welcome sign for the People’s Bank of China, traders are increasingly more concerned about hedging a yuan rise than a fall.
The premium for buying bearish put options in dollar-yuan over bullish calls has hit levels last seen in 2011, a sign traders are paying up to hedge against gains in the Chinese currency. Expected volatility in the pair remains around this year’s average.
Recent tailwinds have buoyed the yuan. A surge in the neighboring yen spilled over last week and sent the Chinese currency to a two-month high as state banks capitalized on the move by selling dollars. The rebound offered the PBOC a window to cut interest rates, stoking bets that officials are turning more toward shoring up the economy.
The currency is little changed over the last month, despite an increased focus on November’s US election and with it the threat of extra tariffs on China.
“Despite the uncertainties over PBOC rate cut and US elections, the spillovers of yen unwinding flow and Fed’s likely rate cut could pose downside risks for the dollar-offshore yuan,” said Mizuho Bank Chief Asian FX Strategist Ken Cheung.
Still, some of the negative factors that have weighed on the currency remain. Yields on China’s government bonds track ever lower, reducing the appeal of yuan assets and suggesting a growing pessimism toward prospects for growth.
“We do not believe sentiment has shifted towards the yuan, nor do we believe that the strength in the CNY reflects any official policy shift, especially as fixing deviations have remained steady,” Barclays analysts Mitul Kotecha and Lemon Zhang wrote in a note.
Sentiment has shifted towards an “extreme,” raising the risk of a reversal, they added.
Momentum may continue to be tested. Factory survey data are expected to show an across-the-board slowdown in July according to Bloomberg Economics. Top leaders in China’s Communist Party delivered no surprises in the Politburo’s July meeting, pledging to step up support for the economy.
The central bank has weakened the daily reference rate for the yuan to the lowest level since November, giving scope for it to fall. The currency was steady around the 7.26 per dollar level in Asia trading Tuesday.
“We sometimes confuse a lack of volatility in options market as a signal that it’s safe, I think it’s more benign neglect,” said Bob Savage, head of markets and strategy at BNY Mellon. “Unless there’s an event that they know could turn policy, it’s just better to be on the sidelines.”
(Update with Politburo statement and currency move.)
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