FxWirePro: Macro outlook of Greater China, bullish/bearish scenarios and CNH options trade recommendations

Macro outlook:

China: February manufacturing PMI stronger than expected; revising up 1Q GDP forecast.

A preview of the NPC meeting.

Hong Kong: Trade activity slowed in January.

Retail sales continue to stabilize.

Taiwan: Manufacturing PMI declined again in February.

CNY bearish:

1) Fed hikes more than expected this year, thus driving a higher DXY and sell-off in major non-USD currencies.

2) Downside risk to China’s growth accelerates, raising concerns on growth slowdown and capital outflows; or

3) Unexpected weakness in Euro or JPY, pushing a broad Asian currency weakness vs dollar.

CNY bullish:

1) Lower-than-expected recovery in US economy and Fed postpones rate hike, leading to a rally of non-USD currencies against the dollar.

2) Growth momentum and trade surplus in China pick up in 2016, diminishing expectation of CNY depreciation.

3) Stronger than expected USDCNY fixing.

Option-trade recommendations:

Buy 3M ATMF/ATMS EUR put/CNH call spread (strikes 7.4380 and 7.2550), carry trade that is insulated from dollar gyrations and therefore more liable to deliver positive carry returns.

Buy 1Y USDCNH 25D RR, monetize directional CNH weakness (orderly or otherwise).