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The market has been preparing for the binary option that will be expiring towards the end of this week as the December 15 tariffs are around the corner. It seems that a deal is hardly on the table, as both sides keep sending mixed signals. Larry Kudlow's interview last Friday sounded vague.
On one hand, he said that a deal was "close"; on the other hand, he said nothing was confirmed and more importantly he stated "we must be tough with China". Such rhetoric does not sound like a deal will be reached any time soon.
Hence, the question for this week has been narrowed down to: Will the tariffs would be delayed? Obviously, it is a hard call. However, given the currently low FX volatility globally, it is even harder to expect to see any big movement in USDCNY with or without a tariff delay.
We support that USDCNH could briefly touch below 7.00 mark if there is tariff delay, while if the tariffs would arrive as scheduled, USDCNH could spike towards 7.20 in the major uptrend (refer 1st chart). If this is the case, USDCNY will remain range-trading. Options markets are also bidding such upside risk possibilities.
Hence, at this juncture, we remain short in CNH on hedging grounds via 6-month (7.00/7.25) 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. The positively skewed IVs of 3m tenors indicate that the upside risks of USDCNH are foreseen, bids for OTM calls upto 7.20 levels substantiate the bullish risks (refer 2nd exhibit). Courtesy: Sentrix & Commerzbank
