Speculative bets that Joe Biden will win the White House on Nov. 3 and bring a steadier tone to rocky Sino-US relations have turbocharged the strongest yuan rally in years, and Chinese authorities have started pushing back.
In recent weeks, the People's Bank of China (PBoC) has cut the cost of shorting the currency and tweaked how it sets its trading range to remove barriers to declines. Chinese state banks have been selling yuan late at night.
Those efforts follow five straight months of yuan gains, driven by resilient exports and foreign capital inflows into China's cheap bonds and surging stocks. The yuan is up almost 7.5% against the dollar since lows in late May.
Yet, alongside the rising odds of a Biden win and yuan bets premised on a view he will be less likely than President Donald Trump to re-open a trade war, the PBoC's discomfort with the pace of gains has grown.
"Most central banks don't want their currencies to appreciate too quickly," said Sunil Kalra, a portfolio manager at multi-asset LC Beacon Global Fund in Singapore.
"If Trump loses and the dollar comes under more pressure, the PBoC doesn't want the starting point of the next rally to be a much lower level of dollar/yuan."
The PBOC's moves, which help exporters who suffer when the currency rises, have coincided with Biden's firming poll numbers and analysts' conviction that his big-spending promises and multi-lateral instincts would lift yuan at the dollar's expense.
"I think the dollar weakness as a whole is a Biden story ... so yuan strength also is part of this Biden story," said Alex Wong, director at Ample Finance Group in Hong Kong.
But Wong said the yuan trade had attracted more attention than other currencies gaining on the dollar in part because of Donald Trump's focus on China, and because of a quick rebound in the world's second-largest economy even as a new round of COVID-19 lockdowns threatens the recovery in Europe.
On Oct. 10, China scrapped a requirement for banks to hold reserves against yuan forward contracts, effectively removing a guard against depreciation.
Then it asked banks to remove another dampener on depreciation by suspending their "counter-cyclical factor," a tool routinely used to massage the value of the yuan's daily mid-point to prevent it from falling too far.
Traders, meanwhile, told Reuters that state banks were selling yuan and using currency swaps to make borrowing it more expensive.
"The PBOC has been successful in dissuading short-term traders from adding positions as they have made it clear they are not happy with large one-way moves," said Kalra.
The PBOC did not respond to Reuters' faxed requests for comment.
Pace, not path
Most of the betting has been through options trades on the offshore yuan as short-term investors bet massively through cheap derivative structures.
That has caused implied volatility on the yuan to soar, with the cost of insuring against one-week moves doubling to a five-year high when the contract rolled over to include US polling day on Nov. 3.
The yuan, meanwhile, has reversed direction this week, albeit giving up just a fraction of its gains.
"It's just a hint (from the PBoC). Get out, because we're not going to let it rally for the foreseeable future," said Stephen Innes, chief global market strategist at brokerage Axi. "When the PBOC starts hinting at a pushback, it's time to get out."
To be sure, not all investors are quitting bets that a Biden win will further lift the yuan, and even fewer think the PBOC's moves are going to reverse the upward trajectory, given China's economic strength in a world laid low by the COVID-19 pandemic.
Deutsche Bank strategist Sameer Goel says Biden's comments show he will neither seek to, nor possibly have the space to materially reverse the direction of US-China relations.
"To the extent though that this is done via a more multilateral engagement, rather than tit-for-tat tariffs, the battle over trade or technology need no longer be fought in currency markets."
(Additional reporting by Winni Zhou and Vidya Ranganathan )