INR: The INR is an ideal high-yield currency. A modest current account deficit and basic balance surplus, low realized vol and favorable carry-to-vol characteristics should continue to entice carry trade flows.

The rupee ended sharply lower, unable to sustain opening gains. Weak equities and yesterday’s Fed rate hikes and forward guidance weigh on the rupee. BoE also saw rising dissent towards an interest rate increase, raising concerns on future inflows in emerging markets.

So for trading perspective, one can buy USDINR in the range of 64.45 with SL of 64.25 for the target of 64.90 levels.

Buy 3M USDINR 25D RR vs. sell 3M USDBRL 25D RR

Short 6M vs. long 1Y delta-hedged USDINR straddles, vega neutral

Sell USDINR 3M 25D strangle vs buy 1Y ATM, vega neutral.

CNY: Catalysed by the PBoC’s announcement of a new CNY fixing formula and the upward squeeze in the CNH interest rates, USDCNY has played catch-up with the broader USD weakness over the past month. As important as these shifts have been in explaining the USDCNY move from 6.90 to 6.80, they remain secondary, in our view, to the fact that China’s underlying BoP position has evolved stronger than market expectations and currency appreciation pressures were already building.

Bearish CNY scenarios:

1) Fed hikes more aggressively than market pricing expects

2) Renewed slowdown in China growth drives fresh capital outflow pressures

3) A sharp fall in EUR and/or JPY spills over into CNY

Bullish CNY scenarios:

1) Fed rate hiking cycle is very benign

2) Growth momentum in China remains firm

3) Bond inflows pick-up momentum.

We are more sympathetic to the second camp of a contained front-end vol argument over coming weeks, and like expressing it in pure volatility format by

i) Selling 6-wk vs. buying 3M vega-neutral straddle calendar spreads that provide short gamma exposure and take advantage of vol curve flatness (vol indic. 0.1/0.15)

ii) AUDUSD vs. USDCNH 2M vol spreads in weighted vega notional to fade the spike in their implied vol ratio while partially hedging against the economic fallout of ongoing credit tightening.