FxWirePro: Zero-cost risk reversals and PBoC’s Ccy swap agreements to hedge CNH

EURCNH is the EUR-cross gift that keeps on giving. We have liked the cross from the short side all year on grounds that its policy-driven nature can help reliably milk the sizeable forward point carry on offer; its positive correlation to EURUSD over recent declines is an added reason to consider owning/upsizing put structures.

EURCNH risk-reversals have quickly bounced back into positive territory (bid for EUR calls) alongside the late-week backup in the Euro, hence asymmetrically struck zero-cost risk reversals can help position for a continued slide in the cross e.g. 3M +1% OTMS EUR put/CNH call vs -3% OTMS EUR call/CNH put are premium-neutral.

Concerns about trade war / China-related risks are natural with such structures and can be relatively easily hedged via long USDCNH – short EURCNH call switches that we advocated as one of the cheapest ways of positioning long dollars with exposure to the RMB tail.

The PBoC has signed the currency swap agreements with many other central banks. Over the past few years, the usage of these swap lines was quite limited.

Right now, Argentina wants to use this line as much as possible, as the country is desperately hunting for a rescue package to ease the Peso crisis, Marcos Pena, the cabinet chief, told the media: “We have an active swap with China that the previous government left us and we will try to make it bigger.” This might be something in PBoC’s mind, too.

Currency Strength Index: FxWirePro's hourly USD spot index is inching towards -79 levels (which is bearish). Hourly CNY spot index was at shy above -85 (bearish) while articulating (at 14:37 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex

FxWirePro launches Absolute Return Managed Program. For more details, visit: 

http://www.fxwirepro.com/invest