Hedge Funds Ramp Up Call Options on RMB — Racing to Break 7 or Staying Cautious?

TradingKey - The weak August nonfarm payrolls report — highlighting persistent U.S. labor market weakness — is pushing the Federal Reserve toward its first policy shift of the year. With a weakening dollar outlook, hedge funds are ramping up call options on the Chinese yuan (RMB) against the U.S. dollar. However, economists warn that due to already priced-in rate cuts and ongoing domestic challenges in China, the pace of RMB appreciation may slow.

Recent data shows that premiums for bets expecting offshore RMB (CNH) to rise against the dollar over the next three months have reached their highest level since August 2024, indicating that short-term investors are intensifying their wagers on dollar weakness.

This positioning aligns with Wall Street’s broader bearish dollar outlook. Bank of America has compared the current political and economic environment to the Nixon era of the 1970s, recommending investors short the dollar and go long on U.S. Treasuries and gold. Morgan Stanley argues that the current dollar bear market is only halfway through.

Société Générale noted a surge in bullish RMB demand in the options market, especially for three-month contracts, showing that short-term traders are re-entering the trade on dollar weakness after the jobs data release.

Notably, these participants are particularly focused on the possibility of USD/CNH falling below 7.0. According to DTCC, the two largest notional value offshore RMB options traded last Friday were linked to the pair reaching 6.90.

Beyond dollar depreciation, most analysts attribute this RMB rally to:

• The PBOC’s recent upward adjustment of the daily midpoint, signaling a stronger yuan
• China’s stimulus policies
• Strong performance of Chinese risk assets

As of writing, USD/CNH is trading at 7.12609, down 0.79% year-to-date.

USD/CNY Exchange Rate, Source: TradingKey

Some analysts argue that in the context of this year’s broad dollar weakness, and given that euro, pound, Swiss franc, and yen have all appreciated more sharply against the dollar, the RMB’s gains have been relatively modest — suggesting the appreciation is still in its early stages and has significant room to run.

However, Nomura Securities warns that since the market has already priced in a 25-basis-point Fed cut in September — and a 50-bp cut is seen as unlikely based on Fed officials’ past statements — USD/CNH may decline only gradually.

Sinolink Securities believes weak U.S. dollar will continue to support RMB strength, but weak export outlook and ongoing domestic demand recovery call for a measured pace of appreciation.

On Monday, September 8, China’s General Administration of Customs reported that August exports rose 4.4% YoY, down 2.8 percentage points from July and the lowest in nearly five months, ending a two-month streak of improving year-on-year growth.

Minsheng Securities analyzed that the PBOC’s recent move to raise the midpoint was intended to maintain stable monetary and exchange rate conditions, and the recent RMB jump resulted from multiple factors aligning. The firm expects the pace of RMB appreciation to slow in the near term.