FxWirePro: A Run Through on Chinese Renminbi Amid US/China Trade Turmoil and FX Derivatives

USDCNY falls like a stone, touching 6.83 marks this week and recovered to 6.87 areas again. The overall sentiment seems to be very bearish on CNY, and there were widely spread concerns that USDCNY would go beyond 7.00 handle very soon. The PBoC would not let the currency go due to concerns of financial instability and uncontrolled capital outflows, we could feel that most people disagreed with me. Interestingly, the question in the market at this moment has completely turned around, as many are asking how far this CNY rally will go. Frequent readers of our research may know that any constructive view on CNY is not held, so, it makes too much sense to chase the current rally. 

However, the short-term dynamics tells that how crowded the CNY short positions are, which means that the unwinding of these shorts may push CNY stronger in the coming weeks, especially in case the G20 meeting goes well next week in Osaka.

USDCNH is another currency which has received close scrutiny from market players due to the ongoing US/China trade dispute. The allocation to short-vol as suggested by the timing model has ranged between 90% to 100% for most of the year: the filtering strategy has helped to reduce the 2% drawdown as experienced by short- vol at the beginning of January, and to overall outperform the benchmark in terms of PnL realized so far this year (+4.0% vs +3.8%). Once again, we deem the performance of the timing model perfectly consistent with its expected behavior. 

While there is no official confirmation on the meeting between the American and Chinese leaders during the G20 Osaka meeting, the Chinese state media confirmed that the Chinese President Xi Jinping will make his first state visit to North Korea this week (20-21 June). 

This marks the first visit to North Korea by a Chinese president in more than one decade. Certainly, the timing seems to be interesting as this visit will take place only one week before the G20 meeting.

In the meantime, Wilbur Ross, the US Commerce Secretary, said that the most likely outcome of the Trump-Xi summit, if it takes place, would be an agreement to actively resume talks, which is somehow in line with market expectations.

Emerging Asian currencies are vigilant against possible weakness in the Chinese yuan. US President Donald Trump notified Chinese President Xi Jinping that a 25% tariff would be levied on the remainder USD325bn worth of Chinese goods if both leaders fail to meet at the G20 Summit on June 28-29. The 12M NDF outright for USDCNY has, for the first time since last November, started to test the psychologically critical 7 levels again. Courtesy: Commerzbank

Currency Strength Index: FxWirePro's hourly CNY spot index is flashing at 99 levels (which is bullish), while hourly USD spot index was at -120 (highly bearish) while articulating at (13:27 GMT).

For more details on the index, please refer below weblink:

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