China’s Q1 GDP growth came in better than expected, at 6.9% y/y. China’s investment accelerated in Q1 while consumption softened. In our view, investment has accelerated due to a delayed effect of the property boom, while consumption unexpectedly slowed owing to sluggish automobile sales.
That said, we think that investment is unlikely to stay at elevated levels for long as property prices have peaked, hence, we see overall growth trajectory moderating over the next few years. We forecast GDP growth of 6.5% in 2017.
China only meets one of the criteria used by the Treasury department, namely a large bilateral surplus with the US. The chances that China would meet all three of the existing criteria over the coming years in very low.
The Street went into the March FOMC meeting pricing three hikes fully for 2017, and two more hikes in 2018. Since then, the dovish March hike, coupled with some sense of disappointment on the progress of Trump’s policy agenda, European political risk (particularly that attached to the French elections), and the recent pick-up in geopolitical risk, contributed to a significant fading of the Trump trade.
The 2s10s curve bull flattened to levels not seen since the US election. Hike expectations have been crushed in the process, with the market now pricing only a 2+2 scenario for 2017 and 2018, two hikes shorts of the 3+3 scenario implied by the Fed’s ‘blue dots’ and our own economists’ projections (refer above graph).
For now, contemplating more bullish rout on the table in medium run amid short-term slumps in USDTRY, we advocate 2w3m USDCNY 1x1 diagonal call spread with conviction (6.8312, ATM), spot ref: 6.88, the positions could be entered at the net credit.
The rationale: The strategy is employed when the options trader reckons that the price of the underlying spot FX would likely dip soberly in the near term, but ponder over bullish risk as the major bull trend still appears to be intact.
Initial credits receive on the short leg would likely to reduce the cost of buying the long leg, hence, we’ve chosen narrowed tenors on the short side and with a view to arresting upside long puts are in place.
