Something is different this time. For the last few years, China has 'ensured stability' in the Yuan ahead of major geopolitical events – no matter what – only to let things slide back into turmoiling after. Ahead of this weekend's G-20, however, and amid notably deteriorating fundamentals (and an increasingly hawkish-sounding Fed), China has let the Yuan tumble in the last week… and traders are piling into bets on post-G-20 weakness to continue.
As Bloomberg notes, history shows that the Chinese currency usually strengthens ahead of major political or economic events, such as President Xi Jinping’s state visits to the U.S. and the Boao Forum.
But this time – ahead of the G-20 gathering – onshore Yuan is being allowed to weaken… back near post-Brexit lows…
Perhaps as another warning to The Fed? But as Bloomberg reports, derivative markets are pointing to renewed bets on yuan depreciation, with a measure of expected price swings poised for the biggest monthly increase since January.
Other indicators, such as the premium on options to sell the yuan over those to buy and the discount of forward contracts over the spot rate, have also climbed, indicating rising expectations for declines.
The increased pessimism comes after a period of calm that sent the measures to the lowest in at least nine months as the Federal Reserve held off on raising interest rates and investors bet that China would steady the yuan before it hosts a Group of 20 meeting in September.
Traders are probing the People’s Bank of China’s willingness to allow the yuan to fall between the G-20 gathering and the currency’s entry into the International Monetary Fund’s Special Drawing Rights on Oct. 1, especially with the chances of Fed action increasing.
"After G-20 ends next Monday, the market may want to test how much yuan depreciation the PBOC can tolerate," said Gao Qi, a strategist at Scotiabank in Singapore. "China doesn’t want the yuan to move too much during G-20 and become a topic of discussion. SDR’s impact will be smaller than G-20."
Offshore yuan bears have already started building short positions to speculate on declines after the G-20 gathering, according to Ken Cheung, a strategist at Mizuho Bank Ltd. in Hong Kong.
“The China data for July demonstrated China growth momentum has been weakening," he wrote in a note. "The PBOC might have a less strong intention to maintain yuan stability after the G-20 summit, and allow yuan depreciation again if expectations remain well-anchored."
And if the Yuan starts tumbling, then US equities will quickly follow.
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