Strategists may be getting increasingly bearish on the yuan but their words are failing to resonate with option traders who see very little chance of the currency falling to some of the most pessimistic levels forecast.
Societe Generale SA have penciled in a year-end target of 7.60 per dollar for the embattled currency while their peers at Bank of America see a slide toward 7.70 this quarter as a possibility — about 5% weaker than Friday’s 7.29 level offshore. However, option market pricing suggests there’s only a 0.2% chance of the latter level being hit over that time frame and just a 19% probability of the former.
The fact that implied volatility in the dollar-yuan pair, a measure of expected price swings, has started to decline suggests the People’s Bank of China is making some progress in its quest to slow a weakening in the currency. Options traders are now pricing in a 34% chance the yuan weakens to 7.40 per dollar by the end of this quarter compared to 45% at the start of the week.
Worries about China’s slowing economy and it’s widening interest-rate differential with the US have sent the yuan tumbling some 5% this year, though it has fared better against the currencies of other trading partners. The PBOC has introduced a variety of measures to slow the depreciation, including stronger-than-expected reference rates and urging state banks to buy the managed currency.
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