USDCNY fixing rates continue to spike higher, which has triggered speculation that further CNY depreciation is looming on the horizon. While it seems that the Chinese central bank (PBoC) continues to weaken its currency via the fixing, the fixing rates are generally in line with what the fixing model suggests so far.

Indeed, China’s central bank has some discretion in managing the closing rates as the previous closing is an important factor for determining the next fixing rate. As the dollar index is range-trading, the weakening bias in CNY fixing rates in recent months is largely due to the weak closing rates, which in PBoC’s opinion points to elevated USD demand.

However, the recent data suggests that overall capital outflows are easing, somewhat inconsistent with the movement of USDCNY spot rates. In the meantime, the FX forward market remains quiet, also signalling that the market does not speculate on a large CNY depreciation.

My best guess is either China’s central bank weakens its currency deliberately, or it wants to release some pent-up pressure on CNY under a favourable market environment.

Well, we cannot afford to sit right back and keep on worrying about a non-existence of option market for Chinese onshore currency (CNY).

Alternatively, as the skewness in OTM strikes in a long run shows probable occurrence, we recommend hedging Chinese currency depreciation risks via bear put spreads of USDCNH using OTM short strikes and ITM long strikes even when IVs are very low around 4.8%.