By Kim Kyoungwha and Lee J. Miller
Dec. 4 (Bloomberg) -- Yuan options traders are increasing bets that China’s currency will weaken versus the dollar just as U.S. Treasury Secretary Henry Paulson starts talks in Beijing seeking appreciation in the exchange rate.
The CHART OF THE DAY shows the premium to buy yuan put options over calls climbed to a record this week as the currency dropped on Dec. 1 by the most since the end of a dollar link in 2005. The one-year, 25-delta risk-reversal rate rose to 10.6475 percent on Dec. 3 from almost zero on Aug. 12. Put options grant the holder the right to sell a currency at a predetermined level, while call options allow for purchases.
“It just shows how people are speculating on renminbi depreciation,” said Dariusz Kowalczyk, a chief investment strategist in Hong Kong with CFC Seymour Ltd., a Hong Kong-based securities house focused on emerging markets. “Paulson would get a heart attack.”
The currency’s 20 percent gain since the peg ended in July 2005, applauded by Paulson, may be eroded as China’s President Hu Jintao seeks to protect exporters from slowing demand as the global economic crisis deepens, he said. A 0.72 percent decline in the yuan on Dec. 1 has set the currency on course for its worst weekly loss since the fixed exchange rate ended.
The yuan, a denomination of China’s currency, the renminbi, traded at 6.8841 per dollar as of 10:10 a.m. in Shanghai, near a five-month low. Non-deliverable forwards contracts in the currency show traders are betting it will drop 6 percent in the next 12 months to 7.3150. The yuan has declined 0.4 percent since June 30, after climbing 6.6 percent in the first half.
U.S. President-elect Barack Obama called on China to stop manipulating its currency in a letter to the National Council of Textile Organizations released on Oct. 24. China’s economy expanded 9 percent in the third quarter, the slowest pace since 2003, raising the risk of rising unemployment and social unrest.
To contact the reporters on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net.
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