FxWirePro: “Hush-hush CNH continues rallies but traders and analysts perceive PBoC to intervene – USDCNH options and RV trades for two-way volatility regime

We at EconoTimes would audaciously proclaim that the CNH’s recent strength is not just a function of extensive dollar weakness, as the currency is up a little over 1% since early December in nominal TWI terms. But in line with the USD weakness, USDCNY looks pretty heavy, heading 6.40 this morning, could not sustain though. Strong equity flows into Asia space have lifted up both market sentiment and Asian currencies.

For now, there is little resistance from the PBoC, although a lot of people believe that China’s central bank should not allow too much strength of CNY.

This seems to be factual thing indeed from the macroeconomic and in particular trade perspective. Nonetheless, in the real world, it is difficult for a central bank to come up with a so-called “bottom line”.

USDCNY likely to swing to more of a ‘two-way volatility' regime in the near-term. News headlines suggest that the China authorities have removed the impact of the countercyclical factor (CCF) in determining the daily USDCNY fixing level. This was followed by further headlines, reportedly from the PBoC, which indicated that the CCF is set by banks and based on fundamentals and the cyclical moves of the FX market.

These statements suggest the beta of the CCF could be adjusted over time. It remains to be seen what role the CCF plays in future fixings, i.e. whether the beta of CCF will be reduced, but in any event fixings since the start of the year suggest that the countercyclical factor has been quite modest. This suggests some shift in the FX policy bias, with the authorities looking to stem the rate of CNY appreciation and introduce more two-way volatility.

At the end of the day, the official CNY index is roughly stable, with slight upward bias recently. So let me make it clear: as long as the dollar weakness persists, the Chinese authorities will let its currency fly. The key highlight over the past week is the breakdown in USDCNH below the critical 6.44-45 support zone.

Contemplating all these fundamental aspects that are likely to drive underlying Chinese currency, consequently, we advocate options trades on hedging grounds as given below:

Short 6w vs long 3m USDCNH straddle calendars.

AUDUSD - USDCNH 2M straddle spreads, 100:125 vega ratio.