China Tensions Spur $2 Billion of Bets on Currency Options

© Reuters. China Tensions Spur $2 Billion of Bets on Currency Options

(Bloomberg) -- Foreign-exchange options traders anxious about worsening U.S.-China relations are using key currency proxies to hedge against the uncertainties.

Tuesday saw nearly $1.4 billion of options traded on the Hong Kong dollar and U.S. dollar that will be profitable if the Asian currency is below 7.61 per greenback in three months’ time, while another $640 million worth of similar derivatives was traded that are tied to the 7.64 level. They could also prove profitable for traders even without spot breaking below the official trading band of 7.75-7.85 if option-implied volatility were to rise sufficiently.

The volume seen Tuesday made the U.S.-Hong Kong pair one of the most actively traded in options for the day, according to Depository Trust & Clearing Corp. data. Option activity in the Taiwanese dollar was also notably higher than normal with turnover in greenback call options nearly four times that of puts.

Traders purchasing the options will likely benefit from a broad increase in yuan’s implied volatility, even if the Hong Kong currency peg is maintained. Swings in the yuan, Taiwan dollar and Hong Kong dollar both moved sharply higher in August when U.S.-China trade tensions erupted.

Read more: Trump ‘Displeased’ With China’s Hong Kong Actions: White House

The hectic activity in the options market came on Tuesday as China’s decision to impose a security law on Hong Kong drew ire from the U.S. and helped push the spread between two-year Hong Kong dollar and greenback swap rates to levels last seen in the late 1990s.

Traders were also worried about possible sanctions as the Trump administration continued to push allies to avoid Chinese businesses perceived as threats to their national security, and criticized China’s handling of the coronavirus outbreak.

“There’s clearly lots of concern with respect to whether or not the U.S. will hit China and HK with sanctions,” said Bipan Rai, strategist at Canadian Imperial Bank of Commerce. “The forwards market has eased up a bit on concerns over the past few sessions, but if imposed, U.S. sanctions would be damaging and might lead to changes with respect to the USD/HKD trading band eventually.”

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