It’s rare that Wall Street decides the trade of the year this early, but 2016 has already been strange in a number of ways.
Talk to traders up and down The Street and it seems everyone has an opinion on where the Chinese yuan is going.
It is the bet everyone is making. The shorts seem to be everywhere.
Bill Ackman wrote about shorting the yuan in his 2015 investor letter, though he admitted that his fund hadn’t profited from the trade yet.
According to the Wall Street Journal, Kyle Bass of Hayman Capital, David Tepper of Appaloosa Management, Duquesne Capital founder Stanley Druckenmiller, Zachary Schreiber of Point State Capital and David Einhorn are all in the trade too.
Can they all be right?
“Clearly a bunch of smart guys are chasing the [John] Paulson 2008 dream of crushing a major structural problem in the market,” Tim Seymour of Triogem Management told Business Insider.
He was referring to John Paulson of Paulson and Co., and his bet against subprime mortgage bonds.
“Can they all be right?”
Seymour posited that if the US tips into its own slow down, and the dollar falls, whatever upside these traders see could diminish significantly.
“China can afford to look out 2-3 years to transition this economy,” he said. “During that time I believe the currency can devalue (and should) 10%. I’m not sure this is the home run ball for these guys.”
Seymour also pointed to what we already know — that China is willing to expend a significant amount of its $3 trillion reserve pile to defend the yuan. We’ll know more about that later this week when the country reports how much of that it still has — Barclays thinks we could be about to see the biggest drop ever.
China has promised traders shorting their currency that it will retaliate, naming hedge fund legend George Soros in an editorial in China’s Global Times last month.
“The attempt to short sell China’s yuan is unlikely to succeed,” said the editorial, describing China’s foreign exchange reserves as one of the best weapons against Soros.
China has also followed through on its threat to pursue shorts. China’s central bank squeezed shorts in Hong Kong using the Hibor interest rate last month.
Bill Gross, the legendary and colourful bond fund manager now at Janus Capital, called out the hedge fund managers shorting China in a Tweet on Wednesday.
Gross: Hedgees are trying to break the Bank of England … uh, I mean the Bank of China. It’s 2016, not 1992.
— Janus Capital (@JanusCapital) February 3, 2016
This is some Wild, Wild, West stuff.
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