Bets on a rising Chinese yuan are fading, as options traders are unwinding one of the year's most popular trades following the Federal Reserve's tougher rhetoric.
Following the Fed's June 17 decision, trading volume in USD/CNY call options (which profit from a stronger dollar) exceeded that of put options, which rise when the yuan strengthens, according to data from Depository Trust & Clearing Corp. The dollar's recent recovery is changing the macro picture amid growing expectations that the Fed could begin raising rates as early as July.
"The options market is showing signs of a shift in sentiment: rising demand for USD/CNH calls signals that investors are reassessing the popularity of bearish bets," noted Ivan Stamenovich, chief financial officer at Bank of America in Hong Kong.
The monthly bias has also changed: traders are now paying a premium for betting on the pair's rise, rather than its decline. At the beginning of the year, traders, on the contrary, expected the yuan to strengthen to 6.50 per dollar by the end of the year after the People's Bank of China signaled its willingness to allow the exchange rate to rise.
The mass exit affected a wide range of options.
"Investor interest in put and digital options on USD/CNH has weakened significantly since the June Fed meeting, with some even closing short positions," noted Nathan Sinclair of Crédit Agricole CIB.
Citigroup is observing a similar trend.
"Investors have largely closed their short positions on USD/CNH, with positioning now neutral. Flows have become more balanced, in contrast to the previous demand for bets against the yuan," said Nathan Swamy.