The PBoC set USDCNY fixing rate at 6.7690 this morning, higher than our estimation at 6.7640. Afterward, USDCNY striked at 6.7747, the highest since 2010 when the CNH market was launched.

Data compiled by SAFE showed that China’s individuals and corporates bought net 26.8bln USD equivalent foreign currencies in September, the highest since March 2016, signaling that China is facing continuous capital outflows despite the capital control measures.

We believe that CNY is still under pressure as the Fed’s hiking bets in December seems to be most likely.

Hedging radar:

Within EM FX, USDCNH has been a notable mover in recent days, breaking above the psychologically significant 6.70 level that had held pre-the SDR inclusion in October and promising more in Q4.

Much of this is a reflection of broad dollar strength as the CFETS basket has remained relatively stable, and it is difficult to imagine that the PBoC’s tight control of the renminbi would give way to a more laissez-faire management regime any time soon.

CNH vols have accordingly remained well behaved through this move: realized vols have remained subdued below 2.5 and ATMs and risk-reversals are a smidge lower, possibly as the market runs into strike supply from call spreads.

We have long held a short CNH vega stance that does not need disturbing yet on recent developments, and are in the camp that CNH weakness expressions via options need to have low/short vega exposure.

With this in mind, and given the cheapness of CNH skews, seagulls of USD call/CNH put spreads funded with USD puts/CNH calls appear appropriate instruments to position directionally short CNH. Use appropriate tenors and strikes as suitable to your exposures.