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The premium of implied volatility to realized has fallen across tenors; most notably at the front-end where the 1m spread has declined by 2.5 vol points (now in negative territory) and in 3m which is 3 vol points lower from the recent high.
Further out the curve, the gap between 1y implied and realized vol is down 1.1 vol points but still remains elevated on a historical basis. This suggests continuing to favor short volatility structures that benefit from RMB weakness.
Since the depreciation phase in 2014 it has been a rare occurrence for CNH to trade at a premium to CNY.
CNH premium over CNY is 50bp (i.e. USDCNH is 50bp lower than USDCNY), while CNH vol is only slightly higher than CNY (0.2-0.3 vol points).
In the 1-3m tenor it is cheaper to short RMB via CNY NDF’s (100-300bp) but from 6m-12m the differential is lower (30-50bp) and under the expectations that CNH will return to a discount to CNY, long USDCNH is more appealing at longer horizons.
Zero cost/small premium option structures can be devised (buy USDCNH call vs sell USDCNY call -equivalent topside strikes) to position for CNH returning to a discount to CNY. Risks are, namely,
1) The premium and 2) The CNH/CNY basis if spot trades above the topside strike.
Alternatively, we kept reiterating the ownership in a 1-year USDCNH seagull structure (USDCNH call spreads against selling a downside put strike) is appealing.
