While the balance of payment provides a more comprehensive set of flows, we look at higher frequency data as well – though still lagging – to have a better gauge, especially of the CNY liquidity situation.

The changes in positions for forex purchases at the PBoC dropped by CNY383bn during November, the biggest monthly drop since January. The magnitude of this monthly drop was still some way off those seen back in January and December last year but the increased outflow pressure in the recent three months has garnered market attention. The resulting tightening in CNY liquidity has already had an upward impact on CNY rates.

Meanwhile, the willingness to exchange foreign currencies into CNY has been falling, with the ratio of forex settlements (exchanging foreign currencies into CNY) to forex receipts through banks dropping to 55.6% in November. When outflows meet with PBoC’s intention to at least slow the pace of RMB depreciation, CNY liquidity is likely to be tightened without any counteracting operations. Or, higher rates are actually desirable against this backdrop.

Any abrupt CNY appreciation is only deemed as the effects of the selling FX reserves to preventing severe CNY weakness further.

CNH Option strategies:

Buy USDCNH 1y topside seagull, strikes 6.90/7.20/7.50, zero cost (indicative, spot ref: 6.94), the structure is a standard 1y call spread strikes 7.20/7.50 fully financed by selling a put strike 6.90, exposed to a maximum USDCNH appreciation of 4.2% at expiry.

Alternatively, one can also buy USDCNH 1y call spread strikes 7.60/8.00, indicative offer: 1.18% (spot ref: 6.94). This longer-term trade positions for further CNH depreciation, generating a maximum leverage close to 6 times beyond 8.00 in one years.