Yuan volatility and the bias toward a weaker yuan in options markets
have surged to record highs in the past week and dealers say
billions of "low delta puts", which pay out only when the offshore
yuan rate gets above 7.20 per dollar, have been taken out.
The yuan is also back under pressure in the offshore spot market,
falling to a three-week low of 6.6510 yuan as London opened on
Wednesday <CNH=D3>. Onshore rates, which China controls tightly,
were steady at 6.5778 <CNY=>.
One-month volatility on the offshore yuan jumped from below 8
percent to almost 10 percent, a record high, versus 8.5 percent on
the euro-dollar equivalent.
Traders said option volumes - difficult to track because most of the
market is conducted over-the-counter rather than on traceable
platforms or exchanges - reached $12 billion on Monday and almost
$17 billion on Tuesday.
In morning trade in London, when dealers in the world's biggest
currency trading center are operating alongside their counterparts
in Beijing and Shanghai, the bias toward a weaker yuan - essentially
a net measurement - on 1-, 2-, 3- and 6-month contracts all
surpassed record levels hit in August.
"Clearly, the market sees that the intensive intervention from PBoC
(People's Bank of China) is not sustainable, and therefore the
central bank will have to let the currency go at some point," said
Hao Zhou, a currency strategist at Commerzbank in Singapore.
Much talk centers around how much more China will have leaked in
reserves in January, in data due by the end of this week.
Reuters polling <ECONCN> of more than a dozen banks puts the fall at
a record $130 billion, reducing China's war chest to combat yuan
weakness to $3.2 trillion.
Some hedge funds betting against the yuan have speculated the drop
will be $200 billion or more. The sales desk of one large
international bank in London was circulating an estimate of $262
billion to selected clients on Tuesday in an email seen by Reuters.
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Analysts from Bank of America Merrill Lynch called on Friday for G20
financial leaders to agree next month in Shanghai to joint steps
that would include a one-off devaluation of the yuan and a
commitment to a stable dollar to prop up flagging growth and head
off another financial market panic.
Against that, China has repeatedly warned "speculators" in the run
up to the week-long Lunar New Year starting this weekend that it
will keep the yuan steady.
China launches its 12-month presidency of the G20 group of developed
and developing economies with the Shanghai meeting of finance
ministers and central bank governors on Feb. 26-27.
Another big report this week on the yuan, from analysts at French
bank Societe Generale, gave a one-in-three probability of the
currency sliding to 7.50 by the end of 2016.
"The People's Bank of China (PBoC) may insist that it has no
intention to devalue the yuan, but capital flows are putting
significant downward pressure on the currency. China's FX reserves
are large but far from unlimited, or even sufficient, if large
capital outflows persist.
"Our central scenario (65 percent probability) envisions USD/CNY
reaching 6.80 in 2016 in a largely gradual and controlled manner,
but there is a large and growing risk that USD/CNY trades up to 7.50
(Editing by Ruth Pitchford)
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