(Bloomberg) — China’s domestic yuan traders appear to be more confident than their offshore counterparts that the currency’s turbulence will be contained around the US presidential election period.
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A gauge of one-month implied volatility for the onshore yuan based on options is trading near the largest discount since 2022 to a similar measure for its offshore counterpart, data compiled by Bloomberg show. Part of the reason appears to be that local traders have greater conviction the People’s Bank of China will help limit yuan fluctuations, even if the vote is won by Donald Trump, who has threatened to boost tariffs on Chinese goods.
“Onshore traders are at ease because the PBOC will be the backstop for any volatility,” said Mingze Wu, a currency trader at StoneX Group Inc. in Singapore. The offshore yuan “is a different story. I guess that’s the difference between having a security blanket versus not having one,” he said.
Both the onshore and offshore yuan have weakened this month as markets wound back bets on Federal Reserve interest-rate cuts and the dollar has been boosted by the possibility of a Trump victory. The onshore yuan has fallen 1.2% in October, while its offshore peer has dropped 1.6%.
While the onshore yuan is confined to a trading range around the PBOC’s daily fixing and is therefore easier for the authorities to control, the offshore currency is more exposed to volatility, especially if bearish sentiment grows.
PBOC Governor Pan Gongsheng said last month China will prevent the building of one-sided expectations in the currency market and seek to avoid any overshooting in the exchange rate. He also reiterated the yuan has a solid foundation to remain largely stable.
‘More Drastic’
The central bank appears likely to intervene if the yuan keeps weakening, said Fiona Lim, a senior currency strategist at Malayan Banking Bhd. in Singapore.
If the advance in the dollar-yuan pair accelerates, “the PBOC could step in with a counter-cyclical adjustment factor in its daily fixes, and the scenario of a Trump win would probably require more drastic measures to stabilize the yuan,” she said. The counter-cyclical factor refers to a tool the PBOC uses at certain times to guide its daily currency fixing.
Nervousness in China’s currency market over a possible Trump presidency isn’t without precedent. During his previous term of office, his policies — especially tariffs on Chinese exports — helped drive the yuan to what was then its weakest level in a decade in August 2019.
There are a number of market players who are seeking to make a profit from the surge in option prices, according to traders.
The yuan’s implied volatility priced into option contracts for three-month and one-year tenors is lower than for the one-month gauge, reflecting expectations that any fluctuations in the currency are likely to abate shortly after the US election on Nov. 5.
If Trump wins and the yuan starts to slide, “the PBOC could step in to manage expectations without hesitation, instead of permitting a freefall of the CNY or engineering CNY depreciation as a counter tool” to US tariffs, said Xiaojia Zhi, an economist at Credit Agricole CIB in Hong Kong.
This week’s main economic events:
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Monday, Oct. 21: China one- and five-year loan prime rate, RBA’s Hauser speaks, South Korea 20-day exports and imports, Taiwan export orders
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Tuesday, Oct. 22: RBNZ’s Sil speaks, New Zealand trade balance
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Wednesday, Oct. 23: Singapore CPI, Taiwan industrial production, South Korea consumer confidence
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Thursday, Oct. 24: Japan PMI, RBA annual report, RBNZ’s Orr speaks, Malaysia CPI
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Friday, Oct. 25: South Korea 3Q GDP, Tokyo CPI, New Zealand consumer confidence, Singapore industrial production
–With assistance from David Finnerty.
(Updates to add historical performance in ninth paragraph)
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