Hedge Funds Increase Their China Yuan Shorts

A handful of mainly U.S.-based macro hedge funds have led bets against China’s yuan since late last year and the coming weeks should tell how right they are in predicting a devaluation of between 20 and 50 percent.

Since at least last September, Texas-based Corriente Partners, which made hundreds of millions of dollars foreseeing Europe’s debt crisis, has been accumulating tailored “low delta” options – essentially bets with long odds – that provide for an up to 50 percent fall in the yuan.

The firm reckons rush by domestic savers and businesses to withdraw money from China will prove too strong for authorities to resist and control, even with $3.3 trillion in FX reserves, the biggest ever accumulated.

London-based Omni Macro Fund has been betting against the yuan since the start of 2014. Several London-based traders said U.S. funds, including the $4.6 billion Moore Capital Macro Fund, have also swung behind the move.

Data from Citi, meanwhile, shows leveraged funds have taken money off the table since offshore rates hit 6.76 yuan per dollar three weeks ago.

Many players say that whether outflows resume in earnest after the Chinese New Year break in the second week of February should show whether funds are right to expect more dramatic declines.

That has prompted comparisons with the victories of George Soros-led funds over European governments in the early 1990s. Chinese state media on Tuesday warned Soros and other “vicious” speculators against betting on yuan falls.

“China has an opportunity now to allow a very sharp devaluation. The wise move would be to do it quickly,” Corriente chief Mark Hart said on Real Vision TV this month.

“If they wait to see if things change, they will be doing it increasingly from a position of weakness. That’s how you invite the speculators. Every month that they hemorrhage cash, people look at it and say, ‘well now if they weren’t able to defend the currency last month, now they’re even weaker’.”

via Reuters

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, he established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza