Investors are scouring the market for cheap hedges against losses in China’s yuan, just as the world’s second-biggest economy prepares to return from a week-long holiday for the Lunar New Year. With implied volatility across all tenors falling to levels not seen since 2022, options have emerged as the most cost-effective vehicle for protection against a bigger-than-expected yuan depreciation.
For the offshore yuan, short-dated implied volatility gauges have been declining since their October 2022 peak. Both one- and three-month implied vols are now at or near two-year lows, meaning that option buyers can scoop up inexpensive protections. Nine-month implied vol — which spans the US presidential election on November 5 — hasn’t fallen as much as its front-end peers. Still, the measure now trades around 5.3%, approaching levels last seen in August 2022 before volatilities soared.
