Why are Chinese yuan hedging costs falling?

Hedging costs are falling due to growing optimism and a strengthening yuan, making it cheaper for investors to protect against dollar losses.

What is the current trend for the Chinese yuan against the dollar?

The Chinese yuan has strengthened significantly, surpassing 7 per dollar for the first time since May 2023.

Are Chinese investors increasing their hedging activities?

Yes, demand for foreign-exchange settlement and hedging instruments has risen, indicating increased investor participation.

Home / Business and Economy / Yuan Hedging Costs Plummet to 3-Year Low

Yuan Hedging Costs Plummet to 3-Year Low

12 Jan

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Summary

Cost to hedge against dollar losses fell to a three-year low.
The yuan has appreciated 5% over the past 12 months.
Onshore banks saw increased demand for FX hedging since December.

Yuan Hedging Costs Plummet to 3-Year Low

Growing optimism surrounding the Chinese yuan has led to a significant decrease in hedging costs for mainland investors, reaching a three-year low. The yuan has demonstrated robust performance, appreciating by 5% over the past 12 months and surpassing the crucial 7-per-dollar threshold last month for the first time since May 2023.

This strengthening is attributed to several factors, including broad dollar weakness, China's expanding trade surplus, an improving domestic economy, and proactive central bank policies. Demand for currency hedging instruments, such as forward foreign-exchange settlement and dollar-yuan put options, has notably risen since December, with onshore banks facilitating these transactions.

The People's Bank of China has further bolstered the yuan's ascent through consistent upward adjustments in its daily fixings. This strategic approach has instilled confidence among traders regarding official support for further appreciation, which is seen as beneficial for international trade relations.