Hedge fund EDL Capital has recently made a bold prediction, suggesting that China’s offshore currency, the yuan, could be the next “black swan event” to disrupt global markets. With the U.S. dollar gaining strength against the offshore yuan by 6% this year so far, EDL Capital believes that there is further potential for the yuan to weaken.
In an attempt to stabilize the currency, Chinese state banks have been observed selling dollars this week. However, EDL Capital points to several factors that may continue to put pressure on the yuan. Firstly, geopolitical tensions have led Western countries to relocate their supply chains away from China, impacting the country’s competitiveness. Additionally, other Asian countries offer a more attractive labor market. The post-pandemic recovery in China has been slow and there are concerns that the country may have lower foreign currency reserves than previously believed.
Although it is uncertain whether EDL Capital profited from options or other derivatives, the hedge fund did have a short position in the offshore yuan. The widening yield differentials between the United States and China, along with expectations of monetary policy easing in China, have further contributed to the pressure on the yuan.
EDL Capital has experienced a successful year, with its value increasing by approximately 8%. The hedge fund’s profits primarily came from long positions in Brazilian and Japanese equities, as well as Brazilian rates. However, trades related to mining, short positions in U.S. equities, and bullish bets on Chinese stocks have detracted from overall fund performance.
Despite the significance of EDL Capital’s prediction and its successful track record, the hedge fund declined to comment on the matter. As the yuan’s value continues to evolve and various factors shape its trajectory, market participants will undoubtedly monitor the currency closely to see if it indeed becomes the “black swan event” that rattles world markets.
