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FxWirePro: Chinese offshore slumps despite upbeat numbers – Seagulls as optimal hedging remains intact for fragile CNH

China reported a USD 51.35 billion trade surplus in January of 2017, lower than a USD 56.67 billion surplus a year earlier but beyond market consensus of a USD 47.90 billion surplus.

Despite the upbeat trade balance numbers, CNH fell by 4.5% against the USD in Q4 of last year but rebounded by over 2% in January.

The other factor which has weighed on broader USD/Asia sentiment has been the significant correction lower in USDCNH.

Part of this correction was no doubt technical, and we still expect CNY/CNH to depreciate over the medium term.

However, the current macro backdrop for China is more supportive for the currency, and it is not as expensive as it was 12 months ago.

This suggests we may not see a resumption of the downtrend in the Renminbi in the near term.

On the contrary, any abrupt CNY appreciation is only deemed as the effects of the selling FX reserves to prevent severe CNY weakness.

CNH Option strategies on hedging grounds:

Buy USDCNH 1y topside seagull, strikes 6.90/7.20/7.50, zero cost (indicative, spot ref: 6.86), 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 4.1% at expiry.

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