This time that has not happened; the market is clearly saying that this stability is temporary.
Hart said he still believes China will need to devalue.
“It would seem China would like to hold the line, for a while maybe. Commodity Futures Trading Commission and banks’ options desks showed large bets going on such options, betting on a fall in the yuan to 7.5-8 per dollar within the next year.
That has left in place chiefly “tail risk” funds like Mark Hart’s Texas-based Corriente Partners or Kyle Bass, who have suggested China would have to devalue the yuan by up to 50 percent to rebalance its economy.
“It’s still a very popular long but it is not at the same peak. They are still in.”
Hedge fund sales desks at four of Wall Street’s biggest banks told Reuters that many U.S. We’ve seen a lot more outflows, a lot of defending of the currency,” Hart told Wall Street pay video service www.RealVision.com. players had made money betting against China by the time Beijing took aggressive steps to prop up the currency in early January.
(Editing by Catherine Evans)
Whereas from September the six-month low-delta option fell from highs of 4.4 percent to 1.8 percent, this time it has retreated from 4.6 percent to just under 3 percent.
The one-year contract in the same periods for comparison went from 9.6 to 4.5 percent last year, and 10.7 to 7 percent. Since then it has recovered roughly half of that value.
“Ultimately for China it is a stay of execution.”
The big trade in December and January for hedge funds like Hart’s was the low-delta risk reversal, an option contract that only pays out in the event of a very sharp move away from current exchange rates.
Data from the U.S.
“There have been a couple of engineered short squeezes, which have primarily effected those who had a spread on or those who were short spot CNH.”
“After the August move subsided the forward points went lower, vols (implied volatility) went lower.
“There is a huge divergence between what happened then and what happened in the past month,” said Chris Morrison, Head of Strategy with Omni Macro Fund in London.
The yuan fell almost 7 percent in a steady depreciation in offshore markets that started in November and bottomed out at 6.75 yuan per dollar on Jan. 7.
Heavy official intervention, limits on some capital movement and a reduction in the amount of yuan available offshore prompted many players either to cut exposure or walk away from the trade by the Lunar New Year holiday last month, they said.. The more active FX guys who have been in and out of the spot, a lot of them were squeezed out in February.
Derivatives pricing for the yuan has fallen back to levels not seen since the end of November.
“There isn’t a hedge fund on the planet that did not have this trade on somehow but the peak of that positioning is past,” said the head of hedge fund sales with one of the six biggest currency trading banks in London. RETREAT
LONDON Two of the three types of hedge funds which bet heavily on a sharp devaluation of China’s yuan last year have backed off the trade, leaving only some ultra-bearish “Black Swan” investors holding long-term bets, fund managers and bankers said.
Even so, other bankers and fund managers note that the retreat in pricing on a yuan depreciation has been far less pronounced than it was after Beijing tried and then retreated on a sharp one-off devaluation last August. Then you have the buy and hold, tail-risk sorts of investors