USD/CNY risk reversal likely to slide if U.S. Treasury Department refrains from designating China a currency manipulator, says Scotiabank

The risk reversal as well as implied volatility in the USD/CNY currency pair is expected to slide further if the United States’ Treasury Department refrains from designating China a currency manipulator in its semi-annual report due this week, according to the latest research report from Scotiabank.

Global market sentiment has improved further after the two-day selloff in US stock markets, as we expected earlier. The VIX Index dropped to 17.62 overnight from 21.30 on Monday, with the 10-year U.S. Treasury yield stabilizing below the psychological 3.20 percent level.

Further, the 10-year UST yield staying below 3.20 percent could be partly attributed to remarks from US President Donald Trump. Trump escalated his war of words against the Fed on Tuesday, calling it his "biggest threat" in an interview with Fox Business.

Also, rallying US stock prices and a sub-3.20 percent 10-year UST yield could boost risk appetite in the region as well, supportive of our short USD/KRW and USD/SGD positions at present, the report added.

However, the 10Y UST yield will climb again on the strong US labor market in the weeks ahead, which will then lead to another sell-off in US stock markets once again and dent market sentiment.

Meanwhile, US job openings hit an all-time high of 7.14 million in August, according to the JOLTS survey that indicates when worker wages might start catching up with the acceleration in employment.

In addition, the quits rate that serves as a measure of workers’ willingness or ability to leave jobs was 2.4 percent in August, suggesting a 12.7 percent y/y rise in the number of workers voluntarily leaving positions.

"We stay nimble on swings in risk sentiment, keeping a close eye on the 10Y UST yield and awaiting the release of the September FOMC minutes and the US Treasury Department’s FX policy report," Scotiabank further commented.