FxWirePro: Maintain neutral stance on CNH but uphold wise hedges

The US trade delegation led by the Treasury Secretary Steven Mnuchin is in Beijing. It is likely that China and US will release a statement on trade disputes over the coming days. The Americans sound confident.

Commerce Secretary Ross said “I wouldn’t go to China if I didn’t think there was hope”. Trade Representative Lighthizer stated the aim is to open China’s market to US corporates. So far, there is little response from China. It seems that the market has adopted a “wait and see” strategy for now, resulting in a low volatility of USDCNY.

On the back of the strong recovery in the greenback, USDCNY has climbed to above 6.35 after the public holidays. However, the official CNY index hit a new high this week, indicating that CNY has outperformed against most other currencies.

On a separate note, China’s private Caixin PMI came in at 51.1 for April, a notch higher than the previous reading at 51.0 and market consensus at 51.0. Same as the official PMI, Caixin PMI holds up amid trade war concerns.

Official manufacturing PMI came in at 51.4 for April, compared with 51.5 in March. At first glance, this reading is not too bad given a number of activity indicators have illustrated a weakening momentum recently. Services PMI edged up to 54.8 in April from 54.6 in March.

As the result, the composite PMI remained stable at 54.1 in April, versus March’s reading at 54.0. It appears that the sentiment indicators are still holding up amid the trade war concerns.

We have not been recommending a long CNH stance, as trade tensions create the likelihood of a stronger Renminbi on a tariff adjusted basis, leaving scope for nominal appreciation more limited. This stance is predominantly reinforced by four key factors:

1. Fair FX valuations. 2. The higher USDCNY fixing bias. 3. A desire to maintain a balanced capital account. 4. Last week’s RRR cut.

A potential pushback against shorting EURCNH calls is that a Euro surge of the kind seen in 3Q’17 could drag EURCNH higher even absent a USD revival; it is a fair critique, but one we judge is low probability at the moment since the unique initial conditions associated with that Euro move.

On hedging grounds, AUDUSD - USDCNH 2M straddle spreads, 100:125 vega ratio.

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