Options Traders See Yuan Collapse Continuing In "Dangerous Situation For Policy-Makers"

Tyler Durden's picture




 

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.

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Wed, 01/06/2016 - 20:47 | 7008035 SILVERGEDDON
SILVERGEDDON's picture

Wi Phuk Yu.

Ha ha ha, velly funny.

You keep treasuries, all your gold are belong to us !

Wed, 01/06/2016 - 20:53 | 7008081 lordbyroniv
lordbyroniv's picture

Fuck everyone.  EVERYONE.

That includes the chinks that stole my job.

Wed, 01/06/2016 - 21:09 | 7008172 Consuelo
Consuelo's picture

Did they really...?

Wed, 01/06/2016 - 21:42 | 7008361 Dead Canary
Dead Canary's picture

Many wow!

~ Ho Lee Sok

Wed, 01/06/2016 - 22:11 | 7008550 ebworthen
ebworthen's picture

I hear you.  State Agency, Chinese girl has full-time with benefits.

This U.S. born male gets 29 hours/week, no bennies.

I have more education and experience.

Allegiance?  None.

Thu, 01/07/2016 - 09:04 | 7010337 lordbyroniv
lordbyroniv's picture

my local Post Office is a veritable gook fest and negro fest.  one white guy and its a pretty large dozen and a half employed people PO.

 

Wed, 01/06/2016 - 20:55 | 7008093 nmewn
nmewn's picture

Policy makers...lol...as in free-shit-money-creators?

Wed, 01/06/2016 - 20:56 | 7008097 kliguy38
kliguy38's picture

Law of Nature will be obeyed.....and gravity is a bitch

Wed, 01/06/2016 - 20:58 | 7008110 DukeMakewater
DukeMakewater's picture

Long gravity.

Wed, 01/06/2016 - 20:58 | 7008113 DukeMakewater
DukeMakewater's picture

Long gravity.

Wed, 01/06/2016 - 21:03 | 7008138 The Most Intere...
The Most Interesting Frog in the World's picture

China's turn to say fuck you.  The Fed started all the bullshit and forced everybody else to follow.  This is a war, not coordination, and it's starting to get interesting.

Wed, 01/06/2016 - 21:05 | 7008151 The Most Intere...
The Most Interesting Frog in the World's picture

Maybe, just maybe, in hindsight, it wasn't such a great idea to put the United States in charge of the reserve currency of the world?

Wed, 01/06/2016 - 21:14 | 7008207 JenkinsLane
JenkinsLane's picture

Reserve currency status is never given, it's taken. 

Wed, 01/06/2016 - 22:09 | 7008545 besnook
besnook's picture

and how did the usa take it? they ruined the pound by burying brits in debt. the chinese will take it from the usa with the same method. china just set a record for outside investment in china during 2015. yea, collapsing alright. bass sees the devaluation as an economic event. it is a war event and the missile is aimed at the dollar.

Wed, 01/06/2016 - 21:08 | 7008163 Consuelo
Consuelo's picture

Gold.

 

Got any...?

 

 

Wed, 01/06/2016 - 21:09 | 7008176 DipshitMiddleCl...
DipshitMiddleClassWhiteKid's picture

short  $aud

Wed, 01/06/2016 - 21:21 | 7008255 ISEEIT
ISEEIT's picture

I'm looking to just get out. This shit is getting eerie.

I hope its just another test?

Wed, 01/06/2016 - 22:00 | 7008487 Fish Gone Bad
Fish Gone Bad's picture

I thought Thursday would be a down market before the jobs numbers came out. Now things look like a scary dark ride. 

Wed, 01/06/2016 - 22:04 | 7008514 besnook
besnook's picture

all the usa has to do is devalue the dollar. lol. hubris is not a good strategy. the problem is the zionazis think they have the guns to win and soon they will be so far into it that they lose and interest rates will rise because no one wants the dollar anymore.

Wed, 01/06/2016 - 22:09 | 7008551 Dark Daze
Dark Daze's picture

Ah, but grasshopper, high interest rates no good for American Treasury.

Wed, 01/06/2016 - 22:06 | 7008529 Dark Daze
Dark Daze's picture

China is an ancient society that has seen lots of good times and lots of terrible times. The people there, although they don't share too many of our (former) values, are not given to giving up. They played the capitalist game with the Americans and they beat the billionaire letches at their own game. China refused to create a super moneyed class at the expense of the other citizens and they flat out refused to refinance their own prouction at high interest rates payable in perpetuity to the US money grubbers. Well, the money grubbers failed, big time. And now they are going to pay the price, big time.

Wed, 01/06/2016 - 22:11 | 7008561 besnook
besnook's picture

the good news is china looks to help the usa create some inflation by making the dollar increasingly useless.

Wed, 01/06/2016 - 22:13 | 7008569 starman
starman's picture

Would love to know how much we actually owe China?

Wed, 01/06/2016 - 22:37 | 7008719 Kassandra
Kassandra's picture

We'll soon find out...

Wed, 01/06/2016 - 23:18 | 7008896 Wild Theories
Wild Theories's picture

numbers don't matter if they won't ever get paid back

Wed, 01/06/2016 - 22:35 | 7008703 Boing_Snap
Boing_Snap's picture

First you will see the deflationary effects of this monkey hammer deval of the Yuan, Higher USD, lower commodities, international trade collapsing further, and down the rabbit hole. Stock markets collapsing globally, and economies melting down.

Money gets stronger here, Gold and Silver, real estate will drop less than everything else and retain buying power relative to what it can buy now.

It will be interesting to see how long the Fed will take to react, S&P 1700 to 1400 and you can bet they will not only reverse their idiot rate hike, they will put out a massive QE.

There is talk now of the Chinese opening a proper gold trading market, 23.5 hr/7day a week trading based on physical settlements, not this paper ponzi Comex. It will be an eye-opener for the West, real money will get its proper valuation.

 

Wed, 01/06/2016 - 23:37 | 7008966 Thought Processor
Thought Processor's picture

 

I would bet that the Fed will head back to zero by mid summer at the latest.  

Then QE4 eva.  After that they essentially own everything that matters.  The banks I mean, the ones that own the Fed that is.  Just like the Japanese Gov. now owns over 40% of the public markets so will the Fed.

Just a matter of time.  It's a race to the bottom from here on out and one that every county is trying not to win but all are forced to compete.  

Any semblance of real capitalism left the room a long time ago.

 

Wed, 01/06/2016 - 22:49 | 7008777 XRAYD
XRAYD's picture

Say, isn't China a currency manipulator?

Wed, 01/06/2016 - 23:58 | 7009035 conraddobler
conraddobler's picture

Reserve curency status is bestowed on the next financial host and then the host is wrung for all it's worth.

Same as it ever was.

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