Don’t be fooled by the Chinese yuan’s drop on Trump’s trade-war bluster. Forward markets show investors are actually betting on it to stabilize, boosting the outlook for South Korea’s won and the Taiwan dollar along the way. 

USD/CNH forward points, particularly the 6- and 12-month tenors, show the yuan depreciating far less in the past month than earlier this year, even as threatened U.S. tariffs provoked a tit-for-tat response from China.

The moves represent wagers that China will keep the yuan stable or even allow more gains, aiming to allay U.S. suspicions it’s using a cheap currency to win a trade war.

So strong are those expectations that they’ve eclipsed worry about slowing economic growth or the resumption of capital outflows. The forward market didn’t waver as the currency declined in the spot market this week for four straight days.

Twelve-month CNH forward points are now trading close to 800pips, near the lowest since June 2014, signifying much-reduced wagers on a weaker yuan. As a result, the CNH forward curve flattened during the past few weeks, driven by the belly and long end.

The flattening move extends beyond yuan forward markets. South Korea and Taiwan, major export powerhouses that are perhaps even more sensitive to U.S. trade policy moves, have also seen lower non-deliverable forward points, particularly for 6- and 12-month sections.

Before the U.S. imposed metal tariffs and took actions against Chinese exports, NDF curves in South Korea and Taiwan had already been pricing in modest currency gains, particularly in late 2018 and early 2019.

The won and Taiwan dollar have stronger fundamentals than the Chinese yuan, since the two economies suffered little of the capital flight or soaring leverage that plagued China between 2016 through last year.