The popular trade to bet against the Chinese currency has gone awry, laying waste to scores of hedge funds who bet against the command economy. There was nothing short of tumult about a month ago, as capital fled the country at a record pace, forcing the government to use its forex reserves to defend the currency.
Over the past month, they’ve been largely successful in reversing the trend, sending the yuan to 4 month highs. The net result, for hedge funds like Pershing Square?
Hundreds of millions in losses.
Seven months after a shock devaluation spurred hedge funds and other speculators to wager on further declines, the yuan’s unexpected resilience has turned many of those bets into losers. At least $562 million of options that pay out if the currency drops below 6.6 per dollar — its weakest point since the devaluation — have expired worthless since August. Another $807 million will lapse within three months.
While those figures provide just a glimpse into the potential losses for pessimistic speculators, what’s clear is that the Chinese government has proven a stronger adversary than many traders anticipated. Policy makers have gone to extreme lengths to prop up the yuan — ramping up intervention, clamping down on capital outflows and waging a rare verbal campaign to restore confidence in the currency. Bears now face a difficult choice: They can abandon the trade, or hunker down for what could become a costly waiting game.
“China wants to have control over the yuan and will do whatever it can to ensure that no one else decides what direction it goes in,” said Hilmi Unver, the head of alternative investments at Notz Stucki & Cie, a Swiss money manager that allocates $3 billion to hedge funds on behalf of clients. “Is it worth fighting against a huge economy and policy maker that could take you out? No.”
Betting against first world governments is a hard trade, one that should be considered a black swan event. For those who lost money in betting against the yuan, hoping the Chinese would capitulate, you deserve everything you’ve received, and more.
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What a novel way to restore some reserves. The Chinese have been keen traders the last few years.
Right on what better way to screw the crowd but by taking the other side of the trade.
Currency trading is dicey, because governments can do unexpected things like this. It’s for people who can’t resist putting their genitals on the chopping block and then finding out later whether they get cut off or not.
Not many governments can do it like this. Takes an iron fist. Perhaps Trumpf can run for Party Secretary.
China Can’t keep it up forever. They were the Creators of our massive Commodity Bubble starting in 2009 when they started stockpiling commodities to give the illusion of global growth and create a massive mess of speculative financing loans around the world. That Yuan Pop came also in Feb from the ECB and BoJ saying they were going to do EVERYTHING. It appeared China’s Last Blast was last Friday dropping the Dollar on that Fixing. But u notice, Shanghai Copper Futures didn’t go all limit up on that at all. Bulls bought the junk on Friday….but today will wake up and find that the stronger Yuan fix on friday was just a result of the Euro Pop from Draghi. Euro moves down and yuan follows. Yes Govt will take all China Bank bad loans and will intervene in their dollar….but us Bears smell blood and we will have our day.
BTW China’s IP and Retail Sales just came out, they missed estimates of Course. Aussie should fade and the Yuan Setting should be a bit lower. Bubbles always pop, even Govt Controlled Chinese Ones.
Dive in! If Pershing Square can do it, so can you!
Meanwhile, retail in the usa… tgt for example, is about to bust out to all time highs. I wonder what’s the cause of this insanity.
The U.S. economy is improving in various areas. Many places have plenty of traffic and some have climbing Real Estate markets. Nothing insane about an improving economy.
Low commods is trickle down qe 4, or whatever number it is now.
Get it down to 6, and I’ll call that a “burn to the ground”. They can do it…but not for long.