Regency Associates says speculators betting that the Chinese renminbi or yuan would continue to fall following the shock devaluation of the currency last August have found its resilience has become expensive.

Hedge funds and other institutional investors had gambled that the renminbi’s devaluation was the start of a process of gradual realignment that would see it weaken against the US dollar to which it had maintained a tight peg enforced by the People’s Bank of China (PBoC).

“Some half a trillion dollars in put options, which would have paid out if the yuan dropped below 6.6 to the dollar, expired worthless,” said Shem Orbison, Regency Associates’ chief economist.

“Considering there are another $807 billion-worth of similarly targeted put options set to expire within the next 3 months, you can see just how bearish these speculators have been on China and how expensive it can be to bet against a central bank with the kind of firepower that the PBoC has,” added Orbison alluding to the $3.2 trillion of foreign currency reserves the Bank has at its disposal.

The PBoC has proven a formidable adversary and has deployed exigent measures to defend the renminbi in the global currency markets including the imposition of capital controls and the restriction of capital exiting China. Regardless, some are opting to tough it out with many believing that worsening economic data on exports and industrial production will lead to a reversal that sees the yuan resume its downward trajectory.

“On the surface of things, we see this going badly for the speculators but there is logic in their argument; Regency Associates just doesn’t think it will play out in the timeframe they’re hoping for,” explained Orbison.

About Regency Associates
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