Option trading on the Chinese renminbi has picked up in recent weeks amid growing pressure for a revaluation of its U.S. dollar peg. Volumes across all maturities have popped 20% over the last month and now exceed USD1 billion, traders estimated. "China's fx policy has taken center stage and become a household topic lately," said Erik Herzfeld, head of options at JPMorgan in Singapore. Greg Kaldor, managing director in institutional sales at Bank of America in London, added, "The noises are just getting too loud not to suggest something is going to happen sooner rather than later."
"The discount on the renminbi has steepened significantly," said Thio Chin Loo, senior currency strategist at BNP Paribas in Singapore. He said the derivatives market is pricing in a 4.5% revaluation, compared to 2% two months ago. Traders have noted speculative positioning for a revaluation has picked up in recent weeks, primarily via non-deliverable forwards and option plays. For instance, speculators have been going short the one-year NDF at RMB7.9065 and financing the trade via the premiums from selling deep one-year out of the money renminbi call/dollar puts at RMB7.50.
Tony Norfield, global head of foreign exchange strategy at ABN AMRO in London, said the Chinese renminbi peg is an informal arrangement in which the central bank maintains the exchange rate around RMB8.28 and the government would not have to make a formal announcement to alter the spot rate.
The recent speculation was kicked off by Cheng Siwei, vice-chair of the National People Congress, when he said, "In the near future, China may mainly focus on widening the floating band." He then added, "In the long term, China may explore ways to peg the yuan with a basket of currencies". Currency players are anticipating a widening of the band against the U.S. dollar to 3-6% from 0.3%. The basket of currencies would probably include the yen and euro. "This will likely take the look and feel of Singapore's nominal effective exchange rate," added Herzfeld.
Norfield, however, thinks the Chinese government is unlikely to change anything before the middle of next year and even then it is more likely to widen the band than either reset an informal peg or introduce a basket of currencies.
