A handful of US-based macro hedge funds are looking for their own personal “Soros moment” and betting on the Chinese yuan experiencing a devaluation of between 20% and 50%.
Texas-based Corriente Partners, which made hundreds of millions of dollars on Europe’s debt crisis, has been accumulating tailored “low delta” options — essentially bets with long odds — that provide for an up to 50% fall in the yuan, reports Reuters.
Corriente is betting that even with $3.3 trillion in foreign exchange reserves, the Chinese government will not be able to resist or control the huge amounts of capital flowing out of the country.
Reuters said that the hedge funds are expecting capital outflows to pick up speed after the Chinese New Year holiday break in the second week of February.
“China has an opportunity now to allow a very sharp devaluation. The wise move would be to do it quickly,” Corriente chief Mark Hart said on Real Vision TV this month.
Some have been betting against the yuan for almost two years, such as the London-based Omni Macro Fund, reported Reuters. The US-based Moore Capital Macro Fund also has a big bet on the falling yuan.
The Soros Moment is considered by many to be the most lucrative bet against a currency in history. In the 1990s, hedge-fund manager George Soros broke the Bank of England by shorting the British pound, which had a fixed rate of 2.7 German deutche marks to the pound, as a condition for entering the European Exchange Rate Mechanism. Soros borrowed heavily to bet on a devaluation of the pound. When the pound eventually plummeted and withdrew from the ERM, Soros walked away with more than $1 billion.
Chinese state media on Tuesday warned Soros and other “vicious” speculators against betting on yuan falls.
Many in the hedge fund industry say expectations of substantial further yuan weakness are no longer a minority view.
Derivatives traders say large bets have been placed in the options market on the yuan reaching 8.0 per dollar and data shows a raft of strikes between 7.20 and 7.60. The big division is over pace and scale.
Corriente and Omni both say if China continues to resist, it may be forced this year into a large one-off devaluation as reserves dwindle.
Funds expecting China to engineer a steady fall are effectively on the other side of that trade, buying options on a measured depreciation while hedging by selling the “low delta” contracts.