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12 Mar 2015
CNY depreciation risk of critical importance – BAML
FXStreet (Barcelona) - Strategists at BofA-Merrill Lynch, view that PBoC’s stance against CNY depreciation might be changing, and hence suggest a trading setup to hedge the depreciation risks.
Key Quotes
“The final and most important factor against EM Asia policy bias for FX weakness is whether CNY will continue to sit on the sidelines and ignore regional FX depreciation. The early signs and motivations suggest this is changing.”
“Firstly, the errors of our daily CNY fixing model for the band mid-point show that the PBoC is fixing USD/CNY more and more in line with the strength of USD.”
“In the recent past it resisted this as […] i.e. the CNY fix was stronger than our model predicted.”
“Uncharacteristically too, the USD/CNY fixings are higher now, in spite of the stronger than expected February trade surplus data (USD60bn) last weekend. This is a break with recent tradition, which typically sees a sustained lower USD/CNY fixing post stronger-than expected trade data.”
“Secondly, China data continues to show weakness as demonstrated by yesterday industrial production release that will motivate more easing.”
“Third, the recent announcement to accelerate the debt swap of LGFV debt into municipal government bonds as well as cutting policy rates – suggests China’s policy is taking a more proactive stance.”
“As such, we hedge CNY depreciation risks via a long 1x1.5 6M USD call, CNH put spread strikes 6.4050 and 6.62 (target 335bp, entry 2 Feb, current 42bps).”
Key Quotes
“The final and most important factor against EM Asia policy bias for FX weakness is whether CNY will continue to sit on the sidelines and ignore regional FX depreciation. The early signs and motivations suggest this is changing.”
“Firstly, the errors of our daily CNY fixing model for the band mid-point show that the PBoC is fixing USD/CNY more and more in line with the strength of USD.”
“In the recent past it resisted this as […] i.e. the CNY fix was stronger than our model predicted.”
“Uncharacteristically too, the USD/CNY fixings are higher now, in spite of the stronger than expected February trade surplus data (USD60bn) last weekend. This is a break with recent tradition, which typically sees a sustained lower USD/CNY fixing post stronger-than expected trade data.”
“Secondly, China data continues to show weakness as demonstrated by yesterday industrial production release that will motivate more easing.”
“Third, the recent announcement to accelerate the debt swap of LGFV debt into municipal government bonds as well as cutting policy rates – suggests China’s policy is taking a more proactive stance.”
“As such, we hedge CNY depreciation risks via a long 1x1.5 6M USD call, CNH put spread strikes 6.4050 and 6.62 (target 335bp, entry 2 Feb, current 42bps).”