With an ever-increasing horde of hedge fund "speculators" daring to confront The PBOC, here is how they are placing theirs bets on Yuan devaluation...
Spot trades are simple but less levered and prone to direct interventionist manipulation. So traders turn to derivatives (more capital effective with their prime brokers) to place their bets.
In the forward FX market...
The FX forwards market has shown significantly more selling pressure than spot as traders place bets on timing and expectations of a devaluation.
In the options market...
As the following chart of risk reversals shows, the difference in volatility (i.e. demand for upside vs downside) between similar call and put options is surging towards the downside bets.
Its is clear that while expectations are rising for short-term expectations of a devaluation, over the next year speculators are increasingly confident of the inevitable.
The last time R/Rs were this skewed was right as China devalued in August.
And in the CDS market...
Perhaps the cleanest pure bet on devaluation - and least prone to direct government intervention - is the sovereign CDS market where China is trading 128bps and while everyone points to the manufactured "stability" in spot FX markets, it is clear that CDS (which is priced in USD) clearly shows investors betting on a devaluation...
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Tracking these three indicators (CNH Spot-Forward spread and Risk-Reversals) will provide indications both of speculative positioning as well as market implied odds of a devaluation. Bank of America is speculating that China will devalue before the Feb 27th G-20 meeting in Shanghai and we also note that next week is Chinese lunar new year and Golden Week... with banks closed, perhaps the perfect time to do a major devaluation?