1. FX Outlook
  2. FX Options Weekly

Macro and Vol Commentary

China’s economy continues to show weakness despite stimulus attempts from the government and PBOC. Is there a change of trend on the horizon?

Economic Outlook

  • The Chinese economy continues to weaken, and the Caixin PMI manufacturing is contractionary, and the trend of the economy is clear after peaking in June at 51.7, and the reading stood at 49.5 in August. 
    1. The cost of electricity surged due to high temperatures as demand for electricity and air con increased. This was in conjunction with COVID lockdowns. 
    2. Output and new orders were low, with the latter the lowest in 3 months, employment was also weak and fell for the fifth month in a row. 
    3. Delivery times lengthened, but input costs fell for the first time since May 2020, and according to Caixin, the rate of decline was the fastest since 2016.
    4. Business confidence is below the historical trend, and we do not expect a change soon. 
  • Services and composite PMIs are falling but are expansionary, with readings at 55 and 53, respectively. 
  • In line with the falling costs in the manufacturing PMI, PPI has fallen to 2.3% Y/Y in August, down from 4.2% Y/Y. Prices for raw materials have fallen, easing pressure for producers. 
  • CPI has also declined in China to 2.5% Y/Y as of August, which was below expectations. 
  • China’s trade balance was weaker than expected, at $79.39bn in August, lower than a revised $101.27bn the previous month and expectations of $92.7bn. 
    1. Exports were significantly below July’s data at 7.1% Y/Y compared to 18% Y/Y. Despite the weakening currency, this highlights the downturn in the global economy and key trade partners. 
    2. Imports were amoebic and grew at 0.3% Y/Y; while demand is traditionally low in the summer months, the weak data highlights a lack of appetite to the consumer from consumers but also reduced business activity as imports of materials were low.
    3. We expect traders to improve marginally as we move into Q4, but the lack of consumer demand in the global economy could cap exports. 
  • Economic data highly correlated to GDP is weak; industrial production growth was marginally above expectations but is at 4.2%. However, the trend is improving after recording a low in April at 2.9% Y/Y. 
    1. The power costs remain a hindrance for industrial producers, and especially in the metals market, we saw output shutdown due to low water levels and power availability. We think industrial production will continue to rise in the coming months. 
  • Retail sales growth was higher in August at 5.4% Y/Y, up from 2.7% Y/Y. However, youth unemployment is high, which will cap retail sales in the long run, with youth unemployment at 19.6%. Retail sales growth was 0.5% in August on a year-on-year YTD basis.
  • Property investment and residential sales are low at -7.4% YTD Y/Y and -30.3% YTD Y/Y. The property sector is a major contributor to the Chinese economy, and the data has been weak as credit has dried up and the industry recovers from Evergrande.
    1. Evergrande has restarted most of the stalled projects, which will prompt an improvement in material demand and economic growth. 
    2. Residential sales are still down on the year, and this further completions may not be what the flagging market needs.
    3. Fixed assets ex rural YTD Y/Y were 5.8% in August, up from 5.7% Y/Y in July. 
  • Aggregate financing is a leading indicator of economic growth, investment, and infrastructure expenditure. The data for August was CNY2,430bn, up from a revised CNY762bn. The stimulus into the economy has not worked this year due to the COVID policy and regional lockdowns. 
    1. Money supply (M2) is still strong growing 12.2% Y/Y, and New Yuan loans stood at 1,250bn in August. 
  • The IMF slashed their GDP figure for China in April to 3.3% from 4.4%, and while some data has improved, there is nothing to suggest the need to upgrade the data. 

The 20th Party Congress starts in October, and Xi is expected to win a third term. Xi wants to continue to push China toward its 100-year goal of building a modern socialist power by 2049. We wait to see what, if anything, will change after the congress. The recent meeting with President Putin suggests that while the narrative is that China, and India, are worried about the crisis in Ukraine, they remain close allies. The main question that the media continue to speculate on is China’s position on Taiwan. Their policy on COVID has heavily impacted the economy and supply chains, but their policy is unlikely to be changed following congress. 


  • The average corporate loan rate has fallen to a record low. As the bank looks to support the economy, the average rate is at 4.05% at the end of August. 
    1. The PBOC have increased policy and development banks’ credit by CNY800bn, created a CNY300bn financing tool, and increased the lending quota by CNY300bn. 
  • The 1yr LPR is 3.65%, with the 5yr LPR rate at 4.3%. This leaves room for future easing, according to the PBOC.
  • They have also defended the depreciating yuan and are assessing the growth dynamics ahead of the 20th Party Congress. The PBOC set the reference rate at 6.9536, stronger than expected.
  • The required reserve ratio stands at 11.25%, which has also been cut this year to allow firms to increase investment and expenditure. 

We agree with the downgrades to the Chinese economy; however, we expect growth to rise above 3.3% as there are signs the economy will perform better in Q4. The Party Congress is integral for Chinese growth prospects next year and the next 5-years. To sustain growth, we believe their COVID policy needs to change, as stimulus measures now are filtered into an economy in partial lockdown. The property sector is a significant drag on the economy, and credit remains tight for the property and commodity sectors, the restarting of Evergrande’s projects will boost material consumption. However, completing these projects will increase the availability of residential and commercial property when sales are already weak. Manufacturing data may tick higher in the coming months as aggregate financing data shows an increase in stimulus and expenditure. There is still room for interest rates to fall, and investment in China is unattractive at this time due to falling rates and their COVID policy; however, in the long run, there remains considerable value. We favour buying dips in USDCNH with any retracement towards 7 being bought as the USD remains firm and the Fed hike rakes into the PBOC’s cutting cycle. 

Sources: China Federation of Logistics and Purchasing,  Customs General Administration RPC,  National Bureau of Statistics of China 

Volatility Commentary

On the China front we expect their economic policy and weaker fundamentals to drive CNH weakness in the short-term. On the other hand, the FED hawkish tone is likely to boost USD strength further, as the market is now expecting a neutral rate of 4.5% - 5.0 % . Except for the summer period, 1-month volatility has tended to realise higher than implied, and we expect this upward trend to continue in light of the current Macro framework, especially considering the job market tightness and inflationary pressures to last in the near term.

USDCNH 1-month Realised and Implied Volatility

Implied Vs Realised (4)

USDCNH Trade Idea

  • Trade idea in 1 month expiry

  • Buy USDCNH Call, 7.103 Strike, in USD 5mio – Pay USD 27K Circa.

  • Sell USDCNH Put, 7.0704 Strike, in USD 10mio – Rec USD 70.5K Circa.

  • Premium net receive USD 43.5K Circa

Positioning Charts

USDBRL NDO Positioning Data 07/09/2022 - 14/09/2022

Volumes on USDBRL was considerably weaker than the previous week with very little upside cover in the market. The upside range was thinner this week at 5.20-5.45, last week we saw some calls traded above 5.50. Spot moved lower this week as Lula continued to be the favourite for the new election, and this caused spot to move lower. However, near term puts have a small notional value and have a narrow range, but we move towards year end there is a large cluster of puts with a higher notional value and moving towards 4.50. 

Usd Brl 7 14 (2)


USDBRL NDO Positioning Data 14/09/2022 - 21/09/2022

Usd Brl 14 21 (1)

USDCNY Vanilla Positioning Data 07/09/2022 - 14/09/2022

The was a shift higher in options executed as spot pushed higher, there is still no clear pattern for options set to expire in the next weeks. The range for calls has shifted towards 7.20-7.30 with an expiry out towards the end of October. The puts traded are clearly higher as well but the notional value is small suggesting little conviction in the market. There have been some put options granted above spot with an expiry in November, but there are also some larger puts traded around 6.70. The calls traded have a clearer pattern but the puts are sporadic, in our opinion the recent trend will continue. 

Usd Cny 7 14 (2)


USDCNY Vanilla Positioning Data 14/09/2022 - 21/09/2022

Usd Cny 14 21 (1)

Charts and Tables

FX Expiries

Expiries (54)

Volatility Grid

Grid (51)

Historical Spot FX Volatility (30D Rolling)

Chart (17)

FX Matrix (today)

Spot (75)

Weekly Change

Week (57)

Key Events & Releases

Calendar (88)


Technical Analysis

JP Morgan Global FX Volatility 


The index continued to edge higher in the last couple of sessions but is still struggling to break above the resistance level of 11.65 as it now trades at 11.48. The stochastics are showing signs of convergence on the downside, and the MACD diff is positive and converging, suggesting the recent uptrend might be exhausting itself. To confirm this, the index needs to break below the 50 and 100 MA levels at 11.28 and 11.25, respectively, before testing 200 MA at 10.96. On the upside, a break above 11.50 and a test of 11.65, the recent highs, would indicate further upside potential. The indicators suggest that there is interest for upside momentum, but it has waned in the last couple of days. With the 50 MA support level holding firm, we expect the index to remain supported above this level is edges closer to it. 

Dollar Index 


The index has continued to breach new highs, breaking above the resistance of 111 to the 112 level. The stochastics have once again converged on the upside back into the overbought, suggesting that while the sentiment on the upside prevails, the index remains overbought and could lose some of that momentum in the near term. The MACD diff is positive and diverging. To continue the recent bull trend, the index needs to break above the resistance at 112 completely before targeting 113. On the downside, if the momentum losses steam, we could see prices decline back below 111 to 50 MA at 110.11. The moving averages are providing support levels for the index in the meantime, and with the indicators still growing, we expect more upside momentum, albeit slowing. 



The pair rallied sharply in the last couple of months, breaching the most recent resistance at 7.1, and is now trading at 7.12. The stochastics are diverging on the upside, with %K/%D rising further in the overbought, and the MACD is positive and diverging, which suggests that the bull trend is set to continue before losing steam. To suggest the outlook of higher prices, the index needs to break above the current levels and then target resistance at 7.13. Alternatively, if the pair finds resistance at current levels, it can reverse down to 7.03 and 50 MA at 7.02. The appetite seems to continue to persist above current levels, and we could see further upside momentum in the near term before the trend reversal. 



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