FxWirePro: USD/CNH OTC outlook, option strategy amid latest development of US-China trade deal

A momentary ceasefire of the trade war after China and the US reached a trade deal over the weekend. The deal means both sides will not impose any new tariff for the time being. Additionally, Washington has agreed not to raise tariffs on US$200 billions of Chinese goods as it had planned to do on January 1 2019. However, the existing 10% tariff rate will remain in force. 

Meanwhile, a negotiation will start immediately on structural changes with respect to forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services and agriculture. Both parties agree that they will endeavor to have this transaction completed within the next 90 days.

According to the White House, if at the end of this period of time, the parties are unable to reach an agreement, the 10% tariffs will be raised to 25%. This deal is largely in line with our expectations that it is most likely that China will make enough vague concessions to achieve a ceasefire that paves the way for further negotiations. Certainly, the negotiation will be difficult and protracted, implying that the road ahead is still bumpy. 

However, a trade deal will give China a short breather, allowing the Chinese authorities to put more efforts on boosting the domestic demand.

On the FX market, the PBoC fixed the USD-CNY at 6.9431 this morning, largely in line with market expectations, showing little bias in the CNY exchange rates after the Trump-Xi meeting. CNY received a short boost in early Asian trading session, with USDCNY trading at around 6.93, the lower band of the current trading range of around 6.92-6.97. 

On a separate note, China’s Caixin manufacturing PMI, a gauge of the performance of private companies, came in at 50.2 for November. While this reading was slightly better than expected, the overall dynamics of the Caixin PMI remains on a soft footing, suggesting that the private companies are still struggling. 

OTC updates:The implied volatility of USDCNY options has been on the rise since October, indicating that the market remains vigilant for the time being.

Unfortunately, there are a lot of risks that can’t be fully hedged by the FX derivative market. Look at what happened in GBP in recent weeks, and you will understand my point.

Trade tips: Buy 9M 40D (7.12 strike) USD calls/CNH puts vs. sell 9M 4.60-5.20 AUDCNH Strangle. Courtesy: commerbank

Currency Strength Index:FxWirePro's hourly CNY spot index is flashing at -110 levels (which is bearish), hourly USD spot index was at -10 (neutral) while articulating at (13:10 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex