FxWirePro: Spotlight on US-China Geopolitical Turmoil - Trade USD/CNH Debit Call Spreads on Trade Negotiations

The outlook for USD/Asia has muddied over the past month. Gyrations around the US-China trade conflict continue to whipsaw USDCNH, which has traced a broad 7.03/7.17 range over the past month. Negotiations are underway at the time of writing and number of options are on the table, with China prepared to up US agricultural purchases, whilst the US is reportedly weighing a currency pact with China as part of a partial trade deal. 

At the start of the week, arguably the best outcome was some type of partial deal whereby China agreed to buy more US agriculture and planned tariff hikes by the US for October and December get delayed. The addition of a currency pact to any partial deal would likely be seen as an additional positive by the market and weigh further on USDCNH, at least in the near term. Details around the currency pact would need to be seen but to the extent that trade negotiations become more closely aligned with USDCNY, the incentive for the China authorities to stabilize the currency could be quite strong. 

Of course, how the final wash up of the current trade talks ends up remains highly uncertain. Moreover, none of the discussions at the moment appear to be entertaining the idea of rolling back existing tariff rates. 

With the recently announced Phase 1 of the US-China trade deal already being peppered with speculation that it would not be signed until the APEC meeting in mid-November, questions arising about the US Congress’ Hong Kong bill and China’s potential retaliation, as well as how the impasse for Huawei and the other Chinese companies on the US’ entity list will play out, the level of uncertainty remains elevated for the global electronics industry and demand.

At this stage, with tariff neutral levels in USDCNY still in the broad 7.05/7.30 range we are maintaining our USDCNH 6-month 7.15/7.35 call spread. Courtesy: JPM