Trading by FX players anticipating a revaluation of the Chinese renminbi has triggered a spike in options market volumes. The renminbi is pegged to the dollar at RMB8.28, but the dollar fell last week against the Japanese yen, often used as a more liquid alternative by renminbi speculators. The greenback dropped to JPY105.15 last Wednesday from JPY106 the previous week.
Callum Henderson, Asian head of FX strategy at Standard Chartered in Singapore, said, "We've seen renewed interest [in trading] by clients of all types expecting a revaluation." Customers have been putting on forward and option positions across the curve on the U.S. dollar/renminbi pairing, he added. An FX options head said about 70% of recent trades put on have been placed on non-deliverable forwards, which are cash-settled contracts often used in illiquid currencies. There has also been an increase in demand for short-term options, particularly one-month contracts, he noted.
One-year forwards are implying an adjustment to the currency pair of over 5.5% by 2006, according to market officials. A trader at DBS also noted increased activity in other North Asian currencies such as Korea, Hong Kong and Taiwan, by hedge funds putting on proxy positions in the more liquid markets.
"[Revaluation] has long-term benefits. A flexible exchange rate would give China more tools for dealing with economic cycles," said Yen Ping Ho, FX strategist at JPMorgan in the Lion City. JPMorgan is expecting a 1-1.5% widening of the dollar/renminbi band before the end of the quarter while Standard Chartered sees a plus/minus 3% move. "There's no doubt in my mind [revaluation] will happen, it's just a matter of when," summed up one official.
