FxWirePro: Do Chinese FX reserves and exports pose trade war threats? FX derivatives to hedge EUR/CNH ahead of ECB

China’s FX reserves declined by USD27bn in February, the first monthly drop since January 2017. Interestingly, the market does not see this as a reflection of capital outflows, because of two reasons: the currency was generally strong over the past year and more importantly, China has imposed very strict capital control measures. China’s authorities explained that the decline is partially due to valuation effect because of mark-to-market losses.

That said, the dynamics of FX reserves will have little impact on CNY exchange rates, at least for now. Regarding trade data: It is always a little bit tricky to interpret China’s trade data in January and February because of Chinese New Year. In February, China’s export surged by 44.5% y/y in USD terms, which sounds unbelievable!

We may have to wait for some time to gauge the actual trade performance. But the extremely high headline export growth could exaggerate the trade war fears. We can also expect a twitter from Mr. Trump soon complaining the sizable trade deficits against China.

While on the other hand, the FX market will pay particular close attention to references as to when the ECB will end the asset purchasing programme. This is seen as the required first step before the central bank is then going to start hiking interest rates. So what is happening with the euro? There has been relatively little news on the European currency over the past weeks. We should do nothing but to maintain a wait and watch approach while holding below FX derivatives strategy on hedging grounds.

Trade tips: Buy 6M EURCNH ATMF vs. ATMS put spreads, Option-based carry to exploit constructive FX view and elevated carry/vol.

Currency Strength Index: FxWirePro's hourly USD spot index has shown 10 (which is neutral), while hourly CNY spot index was at -101 (highly bearish) while articulating at 12:44 GMT. For more details on the index, please refer below weblink:

http://www.fxwirepro.com/fxwire/currencyindex

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