Chinese Yuan Looks Vulnerable On Three Key Drivers - Deploy USD/CNH Debit Call Spreads To Hedge Trios

FX analysis has become very difficult as nobody could predict what would happen in the next day morning. All the surprises related to China come through different channels.

First, the China data dump released this morning clearly illustrated the virus damages on the economy, where we see all data freely falling and hitting record lows.

Looking ahead, there would be some sort of data recovery after the economy gradually resumes operations. However, the hope of a V-shaped recovery seems unlikely given the virus is spreading rapidly all across the world.

Secondly, the Chinese central bank held the rates for medium-term lending facility (MLF) unchanged this morning, although the Fed has slashed the rates to almost zero in about two weeks' time. This somehow contrasts the sluggish economic data, which seems to suggest that the Chinese authorities still want to wait to see the full economic picture after the supplies come back. Nonetheless, it again shows the difficulties to understand China's policy framework.

Thirdly, the housing prices remained almost flat in February while the sales volumes at least halved in the month. This again somewhat surprised me but might also suggest that the housing prices are a lagging indicator. All told, we have so many "unknown unknowns", and the USDCNY still hovers above 7 handle, indicating that the investors also find it difficult to find a convincing direction for now.

OTC Outlook & Hedging Strategy:

Please be informed that the positively skewed USDCNH IVs of 6m tenors still indicate the upside risks, they are still bids for OTM call strikes up to 7.40 levels.

At this juncture, we uphold our shorts in CNH on hedging grounds via 6-month (7.00/7.40) debit call spread. If the scenario outlined above unfolds, we will re-assess our stance but at the moment there are no changes to our CNH recommendations. Courtesy: Sentry & Commerzbank

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