FxWirePro: Chinese offshore currency heads for 4-weeks highs after PBoC into rescue CNH but unwise to be trapped in panicky selling baskets, major uptrend intact

Please be noted that USDCNH has plummeted its prices considerably today and heading towards to retest 4 weeks lows at 6.8928.

Technically, shooting star & doji patterns are traced out at 6.9620 and 6.9717 levels respectively that have evidence slumps below DMAs, heading for strong supports at 6.8553.

The central bank set a stronger-than-expected daily trading midpoint for the yuan, state banks sold dollars and borrowing rates for the offshore component of the yuan rose, all hinting at state intervention to stem losses in the currency.

The major downtrend still looks robust, absolutely no traces of bearish indications (refer longer term technical charts), consequently, we advocate staying hedged for upside risks. Hence, we’ve been firm with our hedging strategies that were recommended in the recent past, the structure is a standard 1y call spread strikes 6.85/7.20 half financed by selling a put strike 6.55, offering beyond 7.20 a maximum leverage of 11 times at the expiry. With no digital risk involved and thanks to the limited convexity of long-dated options, the position can be conveniently delta-hedged if the spot moves lower in the early stages.

Buy USDCNH 1y topside seagull, strikes 6.90/7.20/7.50, zero cost (indicative, spot ref: 6.95), the structure is a standard 1y call spread strikes 7.20/7.50 fully financed by selling a put strike 6.90, exposed to a maximum USDCNH appreciation of 4.2% at expiry.

Buy USDCNH 1y call spread strikes 6.90/7.80, (spot ref: 6.9268) This longer-term trade positions for further CNH depreciation, generating a maximum leverage close to 6 times beyond 8.00 in one years.

Rationale: USDCNH higher highs and higher lows, the next wave of RMB depreciation would see USDCNY trade in a likely range of 7.00-7.30 by mid-2017 (the Q2 2017 point forecast is min.7.10).