Yuan Rally Bets Fade as Options Traders Turn Bullish on Dollar

Bullish bets on the Chinese yuan are fading, with options traders unwinding one of the year’s most crowded trades after the Federal Reserve’s hawkish pivot.

Since the Fed’s June 17 policy decision, trading volume in $100 million-plus dollar-yuan call options — which profit when the dollar strengthens — has outpaced put options, which gain when the yuan advances, according to data from the Depository Trust & Clearing Corp.

The wagers reflect waning enthusiasm toward the yuan after a months-long rally that was underpinned by Beijing’s tolerance for a stronger currency and China’s relative resilience to oil shocks. The dollar’s recent resurgence is altering the macro landscape as speculation grows that the Fed could start raising interest rates as soon as July.

“The option market is showing signs of a shift in sentiment, with increased demand for USD/CNH calls signaling investors are reassessing the popularity of the USD/CNH lower trade,” said Ivan Stamenovic , head of Asia Pacific G-10 currency trading at Bank of America Corp. in Hong Kong.

The dollar-yuan’s one-month option skew has also flipped, with traders now paying a premium to hedge against or speculate on a rise in the pair rather than a decline. At the end of May, pricing favored protection against yuan strength.

The skew reinforces the view that conviction behind further yuan appreciation has faded, Stamenovic said.

That’s a shift from earlier in the year when traders were for the yuan to strengthen toward 6.50 per dollar by year-end after the People’s Bank of China signaled a willingness to allow further appreciation.

Last week, the PBOC set the daily reference rate for the yuan at a for a fourth straight session, the longest run in over a year, amid the greenback’s strength. T. Rowe Price is betting on a , viewing the currency as overvalued against its major trading partners, while Allianz Global Investors has and moved to a neutral stance.

“We believe dollar momentum has room to run in the third quarter and see upside in USD/CNH,” said Alex Loo , a senior macro strategist at TD Securities in Singapore. “Investors are likely dialing back long yuan trades as the disappointing economic data run since April hint of a poor 2Q GDP read. This should prompt PBOC to nudge down yuan strength to support exports.”

Broad Retreat

The rush to exit the trade has been widespread across different types of options.

“Investor interest in USD/CNH put and digital options has faded substantially since the Fed’s June interest rate meeting, with some of them even unwinding existing downside positions,” said Nathan Sinclair , Hong Kong-based head of FX options Asia at Crédit Agricole CIB.

Digital options provide a fixed payout if a currency pair reaches a predetermined level at expiry.

Citigroup Inc is witnessing a similar trend.

“We are seeing that investors have squared up short USD/CNH positions to a large extent and estimate positioning to be neutral currently,” said Nathan Swami , the Singapore-based head of foreign-exchange trading for Asia Pacific. Option “flows have been more balanced and two-sided as opposed to demand for downside plays seen earlier.”