Traders See Yuan Bets as a Hot Option Trade After the Release of U.S Payrolls

Hedge funds are stepping up wagers that the Chinese yuan will gain ground against the US dollar, after disappointing American jobs data raised concerns about the strength of the US economy.

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Options markets show that the premium for betting on the offshore yuan appreciating versus the greenback over the next three months is hovering near its highest levels since August 2024. That signals hedge funds and other fast-money investors are preparing for further dollar weakness.

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Trading activity has spiked in options tied to a stronger yuan, particularly around the three-month maturity window. According to Ruchir Sharma, global co-head of FX options at Societe Generale in London, hedge fund clients are “re-engaging with dollar weakness post the data.”

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Strikes below the 7.00 level have attracted particular attention, Sharma noted. For perspective, the onshore yuan ended last week at 7.1324 per dollar, underscoring just how much conviction traders have in a potential shift lower.

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This growing appetite for bullish yuan positions coincides with signals from the People’s Bank of China (PBOC) that it is comfortable allowing the currency to strengthen. In fact, the yuan’s daily reference rate was set on Monday at its firmest level since November.

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At the same time, Chinese equities have staged an impressive rally in recent weeks. That rebound has tempered expectations that Beijing will push for more monetary easing in the near term, adding another layer of support for the yuan. The timing couldn’t be more critical, as the US labor market report on Friday showed August job growth slowing sharply.

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Sharma suggested the trend could build further momentum, noting that investor positioning ahead of the jobs report showed “clients were not meaningfully short” the dollar versus Asian emerging-market currencies. That leaves space for additional bearish bets on the greenback.

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Data from the Depository Trust & Clearing Corporation confirmed this activity, showing that the two largest offshore yuan option trades on Friday involved 6.90 strike puts. These contracts gain value if the dollar-yuan pair drops below that strike price before expiration, reinforcing investor expectations for yuan strength.

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Despite the mounting evidence of bearish sentiment on the dollar, not everyone believes the currency is headed for a sharp decline. The key debate among traders is less about whether the dollar will weaken and more about how quickly it will happen.

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Markets have already fully priced in a 25-basis-point rate cut from the Federal Reserve at its upcoming policy meeting this month. Some participants have even speculated about the possibility of a larger 50-basis-point reduction, but that remains unlikely given the central bank’s recent messaging.

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Sagar Sambrani, senior FX options trader at Nomura International in London, expects only a measured decline in the greenback.

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“We think the dollar will gradually trend lower,” Sambrani said. “Markets are already pricing in about a 28-basis-point cut for the FOMC this month, and given the Fed’s rhetoric in recent months, a half-point cut seems highly improbable.”

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The combination of soft US economic data, firmer signals from China’s central bank, and strong equity performance in Chinese markets has created fertile ground for a yuan rebound. Hedge funds appear to be positioning themselves for this scenario, with demand for bullish options trades climbing to near year-high levels.

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Still, the broader consensus suggests dollar weakness will unfold at a steady pace rather than through an abrupt drop. For investors, this dynamic underscores the importance of monitoring both Federal Reserve policy and China’s currency management strategies, as these will remain the key drivers shaping dollar-yuan moves in the months ahead.

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