FxWirePro: Quick Run Through On Dip In Chinese Forex Reserve And USD/CNH Debit Call Spreads

Is this the right time for even a partial rollback of our coronavirus lockdowns and resume our respective businesses? The prevailing pandemic doesn’t seem to allow that, the total reported death cases exceeds 1.4 million due to the deadly contagious coronavirus, almost all markets have halted with a trauma.

But, China’s Wuhan megalopolis, the outbreak’s first epicentre is finally relaxing its rules after a lockdown that lasted more than two months. As of today, outbound travel is allowed again, at least for those who can show a green QR code on their phone screen that denotes good health.

China's FX reserves declined by USD46bn in March, the biggest drop since December 2016. However, the authorities explained that this is largely due to the valuation effects as stock market crashed in March and dollar strengthened (which would reduce the dollar value of non-dollar reserves). Recent data provided by Chinese foreign exchange regulators suggest that corporates and individuals have turned to net selling dollar positions (i.e. long CNY) in the first two months of 2020.

Nevertheless, it remains questionable whether this trend could sustain. In the FX market, CNY simply ignored the seemingly negative headline reserve data, and rallied against the overall risk-on sentiment, with USDCNY below 7.05 mark.

Please be informed that the positively skewed USDCNH IVs of 6m tenors still indicate the upside risks, they are still bids for OTM call strikes up to 7.48 levels.

Hence, at this juncture, we uphold our shorts in CNH on hedging grounds via 6-month (7.00/7.40) debit call spread. If the scenario outlined above unfolds, we will re-assess our stance but at the moment there are no changes to our CNH recommendations. Courtesy: Sentry & Commerzbank