Surely, The PBOC will step in at some point and save the collapsing currency? Nope - not if options traders (and Kyle Bass) are to be believed. The odds of the yuan breaking beyond 7 to the greenback by the end of March more than doubled to 12% (from 5.8% at the start of December). Ironically, Bloomberg reports only 1 of 39 analyst predicts Yuan to trade beyond 7 by the end of 2016. The market's extremely strong conviction, and apparent PBOC loss of control is "a dangerous situation for policy-makers" according to one Asian economist.
As Kyle Bass noted,
"Given our views on credit contraction in Asia, and in China in particular, let's say they are going to go through a banking loss cycle like we went through during the Great Financial Crisis, there's one thing that is going to happen: China is going to have to dramatically devalue its currency."
And as Bloomberg reports, the options market agrees - signaling that the yuan’s slide to a five-year low has plenty of room to run.
Contract prices indicate a 79 percent probability that the currency will weaken this year and 33 percent odds that it will drop beyond 7 per dollar, a level last seen in 2008, according to Bloomberg calculations. That’s up from 15 percent at the start of December and comes as the central bank shows signs of reining in its support for the exchange rate in the face of rising intervention costs and sliding exports.
“We’ve seen explosive growth in demand for options betting the yuan will weaken as clients seek protection against further depreciation," said Frank Zhang, Shanghai-based head of foreign-exchange trading at China Merchants Bank Co., which trades yuan options. "The situation won’t get better until market sentiment stabilizes in the spot market, which isn’t going to happen in the next few months."
The odds of the yuan breaking beyond 7 to the greenback by the end of March jumped to 11 percent from 5.8 percent.
The notional value of outstanding put options carrying the right to sell the yuan at exchange rates of 7 or higher has climbed to $142 billion from $120 billion, Depository Trust & Clearing Corp. data show.
Despite the market's sentiment, economists remain less convinced...
Only one out of 39 analysts in a Bloomberg survey predicted a slide to 7 per dollar in 2016.
The median estimate is for a 0.6 percent retreat to 6.6. Goldman Sachs Group Inc. said this week that it sees “limited” room for further depreciation as slumping energy prices will help boost China’s current-account surplus and offset capital outflows.
The People’s Bank of China has been burning through its foreign-exchange reserves to prop up the yuan, with the stockpile recording its first-ever annual decline last year, as the central bank sold dollars both in the onshore and offshore markets. But since The IMF 'enabled' Chinese currency wars, support has been less obvious and the yuan has become a “one-way bet, and the market has figured out that it’s a one-way bet,” Richard Jerram, chief economist at Bank of Singapore, said at a press briefing in Hong Kong on Wednesday.
He concludes:
“It’s a dangerous situation for policy makers.”
China is due to report foreign-currency reserves on Thursday, with the median estimate in a Bloomberg survey predicting a $23 billion decline in December.