FxWirePro: Bullish, bearish CNY scenarios and hedging perspectives

Key drivers of CNY view:

CNY depreciation risks have been reduced considerably. NIIP (net international investment position) data suggest corporate deleveraging has advanced significantly, while purchases of offshore assets have scope to slow down this year.

We expect FX outflows driven by the corporate sector will be more gradual in 2017, as mismatches in the balance sheet have adjusted sharply in recent years

Bearish CNY scenarios:

1) Fed hikes more aggressively than expected;

2) Downside risks to China’s growth emerge earlier than expected.

Bullish CNY scenarios:

1) Benign US inflation sees the Fed deliver a softer rate hike path;

2) The growth momentum and trade surplus in China pick up further in the second half of 2017, diminishing expectations on CNY depreciation;

3) The counter-cyclical adjustment factor remains biased towards CNY appreciation. We believe downside optionality offers the best value and vol would go lower with the spot.

A  USDCNH 3m put strike 6.75 RKO 6.60 costs around 0.18% (vanilla is about 0.36%) and covers the period preceding the leadership changes in 4Q’2017.