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(Bloomberg) -- Hedge funds are ramping up options wagers signaling that the yuan’s rally against the dollar still has room to run.

Their demand for options that become profitable if the yuan rises against the dollar has increased, according to traders who asked not to be identified. Investors are now targeting a yuan around 7 or stronger by year-end, SGX Derivatives Exchange data show, on rising confidence in China providing policy support, and shifting US interest-rate expectations.

“We have seen a pickup in demand for downside for dollar-offshore yuan, mainly from hedge fund clients,” said Saurabh Tandon, global head of foreign-exchange options at Standard Chartered Bank in Singapore. The pair’s implied volatility, especially in nearer-dated contracts, had declined due to low realized volatility over the last few months “and that’s making buying downside options an attractive trade.”

The increase in demand for bearish dollar-offshore yuan bets comes as The People’s Bank of China raised its daily reference rate for the yuan by the most in nearly a year last week. Meanwhile, the dollar is under pressure amid growing market expectations that the Federal Reserve will resume cutting rates next month after Chairman Jerome Powell’s Jackson Hole speech.

What’s more, investor sentiment toward Chinese assets appears to be improving due to factors including supportive fiscal policy and “benign progress” in trade talks between the US and China, said Jingyang Chen, Asian FX Strategist at HSBC Global Investment Research, in a client note dated Friday.

On Aug. 28, the most heavily traded dollar-yuan option expiring in December was a put that had a strike of 6.94, according to options trades executed on the SGX Derivatives Exchange. That means the buyer of this option can sell the dollars for yuan at 6.94. The put option gains in value if the currency pair falls below this level. Dollar-offshore yuan was trading around 7.1274 as of 12:30 p.m. Hong Kong time on Monday.

“We have seen increased downside interest from clients on USD/CNH recently,” said Dhaval Shah, managing director of currencies and EM sales at JPMorgan Chase & Co. in Singapore. “The expression has been a mix of cash and options.”

Despite the yuan reaching its strongest level in nearly 10 months last week, the premium to hedge against it falling versus rising over the next month remains well below this year’s high.

“We saw fresh interest for down-strikes but buying remains tactical and measured,” said Ivan Stamenovic, Hong Kong-based head of Asia Pacific G-10 FX trading at Bank of America Corp.

Onshore Chinese market data released on Friday shows monthly volume of FX options, which consists of both retail and interbank trading, rose to $227.8 billion in July, the highest since the State Administration of Foreign Exchange started publishing the data in 2015.

Some exporters were selling dollar-yuan calls to increase returns from FX assets in recent months when yuan volatility dropped, according to traders who asked not to be identified. However, last week, the yuan’s advance prompted more dollar-yuan put option buying, they said.

--With assistance from Ran Li.