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China will be the focus for the market this week. China’s Communist Party will hold its once-every-five-year congress this week, and the new leadership group will be officially announced early next week. In the meantime, China will release its Q3 GDP figures this Thursday, and PBoC’s governor Zhou Xiaochuan hinted over the weekend that the growth should look fine. He said that China’s economy is expected to grow 7.0% in the second half of 2017, from 6.9% in the first half of this year.
In the meantime, Zhou also explicitly stated that “corporate debt is too high”. Such comments have been quite rare in the past. They indicate that monetary policy leans towards the de-leveraging camp. The inflation figures released this morning suggest that there is limited underlying pressure on the price front, however. China’s CPI rose 0.5% in the month, which might look quite strong.
However, after seasonal adjustment, CPI rose 0.15% m/m in September, versus 0.22% in August. In the currency space, the movements of USDCNY could be very boring over the next two weeks given the political backdrop. Today’s USDCNY fixing rate is in line with market expectations. After all, stability outweighs anything else for the time being.
In the past five weeks, there have been unusual gyrations in the USDCNY fixing, and around FX policy in general: at the beginning of September jawboning against an excessive pace of down-move in USDCNY (and up-move vs the CFETS basket) quickly intensified into a removal of USDCNY forward buying restrictions that drove a retracement higher as large as 3.8% over the subsequent month. But then early this week the September up-trend sharply reversed again, though this time less driven by unusual fixings.
We also like complementing them with near zero-cost long USD put /CNH call spreads financed by selling USD call/CNH put spreads partly to take advantage of the divergent historical rich/ cheap of USD put and USD call skews, and in large part to express a view that the regime change signalled by this week’s moves represents something more substantial than a mere one-and-done affair and can be trusted to comfortably cap spot upside even if additional downside from here is fitful.
For instance, off spot ref. 6.5879, 3M 6.70/6.44 USD put spreads vs 1m 6.70 call writing.
