China’s FX reserves declined by 69 bln USD in November. This is the largest decline since February of this year. The decline points to continuing capital outflows, despite the best efforts of the Chinese authorities. In the short term, we must expect that total reserves will decline beneath the psychologically important level of 3 trillion USD. What we clearly see is that PBoC are selling FX reserves to prevent a more severe CNY depreciation.

One should clearly understand that the recent upmove in USDCNY is largely a reflection of USD strength rather than CNY weakness. A simple comparison between USDCNY and the CFETS RMB index shows that during October and November the weighted basket remained effectively flat, whereas USDCNY appreciated in line with broad USD appreciation. US officials cannot reasonably claim that China is deliberately weakening CNY.

On the contrary, any abrupt CNY appreciation is only deemed as the effects of the selling FX reserves to prevent severe CNY weakness.

CNH Option strategies:

Buy USDCNH 1y topside seagull, strikes 6.90/7.20/7.50, zero cost (indicative, spot ref: 7.02), the structure is a standard 1y call spread strikes 7.20/7.50 fully financed by selling a put strike 6.90, exposed to a maximum USDCNH appreciation of 4.2% at expiry.

Buy USDCNH 1y call spread strikes 7.60/8.00, indicative offer: 1.18% (spot ref: 6.9050) This longer-term trade positions for further CNH depreciation, generating a maximum leverage close to 6x beyond 8.00 in one year.