Bloomberg News

Sales of Notes Betting on Yuan Gains Soar Even as Concerns Mount

May 25, 2012

Investors made the most bets this year in May that the Chinese yuan will gain against the U.S. dollar, even as concerns mounted that the world’s second-largest economy may be slowing.

Banks including Barclays Plc (BARC) sold 12 structured notes this month that profit when the renminbi rises against the greenback, compared with three in April, making it the most popular currency bet, according to data compiled by Bloomberg. The dollar-euro exchange rate was second, linked to nine securities.

Barclays, which sold $330 million of yuan-dollar notes since April, offers principal protection on most of the securities, said Matilde Acerra Skelton, the bank’s head of foreign exchange structuring for the Americas in New York. Speculation has increased that China’s efforts to cool inflation may push the economy into recession and prompt the authorities to depreciate the renminbi.

“Investors are still generally bullish on China, but think that a hard landing is a possibility so they prefer principal protection, but they are also looking to take advantage of any upside in the currency,” Skelton said.

Goldman Sachs Group Inc. (GS:US), Morgan Stanley (MS:US) and Credit Agricole Corporate & Investment Bank also sold structured notes tied to the exchange rate in May, Bloomberg data show.

Slowing Growth

China’s economic growth may slow to 6.4 percent without policy stimulus if Greece abandons the euro, economists at China International Capital Corp, the nation’s biggest investment bank, said in a May 23 report. That would be the worst annual rate since 1990. The World Bank predicts China’s economy will expand 8.2 percent in 2012, down from 9.2 percent in 2011 and 10.4 percent in 2010.

Most of Barclays’s securities linked to the yuan were bought by private banks, and U.S. investors snapped up about $88 million of the products, Skelton said. The bank also sold about $22 million of structured notes betting the yuan will also gain against the euro and the U.K. pound.

The yuan dropped 0.26 percent this week to 6.3444 per dollar in Shanghai, according to the China Foreign Exchange Trade System. The currency touched 6.3525 today, the weakest level since Dec. 20, and is heading for its worst month in at least five years. One-month implied volatility, a measure of exchange-rate swings used to price options, decreased five basis points, or 0.05 percentage point, today to 2.1 percent

Two-year implied volatility was at about its lowest point in May since 2007, making yuan-linked notes cheaper to issue, Skelton said.

To contact the reporter on this story: Alastair Marsh in London at

To contact the editor responsible for this story: Paul Armstrong at

The Good Business Issue

Companies Mentioned

  • GS
    (Goldman Sachs Group Inc/The)
    • $195.45 USD
    • -0.44
    • -0.23%
  • MS
    (Morgan Stanley)
    • $38.72 USD
    • -0.09
    • -0.23%
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