1. FX Outlook
  2. FX Options Weekly

Macro and Vol Commentary

After a stronger performance in Q1’23 following the lifting of Covid restrictions, China’s economic momentum is losing steam. With CNY depreciating 5% against the dollar this year, what is the outlook for one of the worst-performing Asian currencies?

Chinese Economy

  • Following a better-than-expected performance in Q1, which saw Chinese economy grow by 4.5% YoY, the second largest economy’s growth is set to stall in the coming months.
  • The rebound in consumption slowed in Q2.
    • Retail sales, a key gauge of consumption, increased by only 12.7% in May, compared to 18.4% in April.
    • While marking the fourth period of rise, it was below market expectations of 13.6% as consumers proof increasingly reluctant to spend.
    • May’s consumer spending increase is in part attributed to the low reading from the same time last year when several cities were under strict lockdown restrictions.
  • June data show activity in the services industry and construction sector dropping to its weakest level since December 2022.
    • NBS signalled third month of contraction in manufacturing activity with a reading of 49 as new orders, buying activity and export sales all extended declines.
    • Non manufacturing PMI declined to 53.2 from 54.5 in May, marking the weakest growth since January as demand for in-person services softens.
    • Caixin pointed to a slower factory expansion in June, at 50.5 from 50.9 in prior month.
    • We expect manufacturing activity to remain muted in the near term as firms grow increasingly concern about sluggish market conditions.
  • At the same time, employment fell for a fourth month in a row, signalling greater headwinds for the country with high unemployment rate among the youth.
    • Youth jobless rate hit a record high of 20.8% YoY in May, up from 20.4% YoY in April.
  • Exports and imports have also contracted sharply in May, falling to -7.5% YoY and -4.5% YoY, on souring demand conditions.
    • We expect exports to continue decreasing as overseas market appetite will remain muted in the face of growing recessionary fears.
  • While real estate industry saw a slight rebound in Q1, marking the first expansion in more than a year, Chinese remain reluctant to borrow to buy new homes.
    • The first 5 months of 2023 saw a decrease in the amount of longer-term loans advanced by banks, indicating fewer people taking out new mortgagees.
    • According to a survey of depositors conducted by the central bank, 17% of people expect housing prices to fall in the next quarter compared to 14.4% in the previous survey.
    • Property investment is unlikely to rise back to levels seen before the pandemic.

Fiscal and Monetary Support

  • Policymakers have pledged considerable support to help the economy recover, but fiscal support for the economy has been weak this year.
    • Total government spending in H1’23 increased by less than 1% compared with the same period last year.
  • The slowdown in economic activity led the PBOC to cut its one-year loan prime rate by 10bps in June.
    • Still, LPR was lowered by less than expected and stands at 3.55%.
  • While the cut will lower the cost of new loans, it is unlikely to accelerate credit growth given weak credit demand.

The outlook for the Chinese economy is lacklustre while the economic data from the US points to continued resilience. So far, this dynamic has led the yuan to drop to multi-month lows, pushing the currency pair to test the 7.25 level. Given the current economic background and the inverse direction of monetary policy pursued by the two countries, we expect bullish dynamics of the USDCNY currency pair. On the downside, the prolonged hawkish stance by the Fed, which usually pushes the dollar higher, is starting to translate into a weaker economic picture. Since last Friday, the dollar has started to depreciate against other major currencies and any sign of a slowing US economy could lead the CNYUSD to retrace, finding support around the 7.22 level.

Sources: S&P Global, National Bureau of Statistics of China, The People's Bank of China

Volatility Comment

Realised Vs Implied (13)

Implied volatility has exhibited a consistent range between 5.3% and 5.6%. Over the past three months, the realized volatility has remained lower than the implied volatility, with a notable increase from its April lows of 2.4% to the present level of 5.1%. Notwithstanding the relatively low volatility in USDCNH, it is worth noting that we maintain a bullish skew on CNH. This suggests an optimistic outlook for the CNH currency, despite the current stability in its volatility levels.  

USDNY Trade Idea

Put Spread  

  • Buy 7.3 strike Put  
  • Sell 7 strike Put  
  • Notional 5m USD for each leg  
  • Expiry 3 months 10/10/2023  
  • Cost:  95k USD  
  • Potential payoff: 140k USD if spot finishes at 7.1 

Positioning Charts

EURUSD Vanilla Positioning Data 23/06/2023 - 30/06/2023

The appetite for EURUSD options expiring in the week ending July 7th has diminished slightly, especially down the curve. Both the number and the volume of notional reduced. Still, the ratio of puts to calls remains fairly balanced, suggesting the market does not see the pair breaking out of the current range rapidly. The range for expiries in August reduced slightly, but the upside and downside covers for September remained the same. We expect the pair to remain range-bound in the near term.

Eurusd 23 30

EURUSD Vanilla Positioning Data 30/06/2023 - 07/07/2023

Eurusd 30 7

USDCNY Vanilla Positioning Data 23/06/2023 - 30/06/2023

USDCNY options expiring in the week ending July 7th have shifted to higher ranges given the recent pair moves on the upside. At the same time, the number of puts has been shifted closer to the near-term, expiring within the 7.10-7.30 range. At the same time, the upside cover was extended from 7.30-7.50, suggesting the market is split on the direction of the move. Down the curve, the number of calls is seen diminishing, suggesting downside pressures for the pair in the longer term.

Usdcny 23 30

USDCNY Vanilla Positioning Data 30/06/2023 - 07/07/2023

Usdcny 30 7

Charts and Tables

FX Expiries

Expiry (56)

Historical Spot FX Volatility (30D Rolling)

Chart (45)

FX Matrix (today)

Spot (104)

Weekly Change

Week (85)

Key Events & Releases

Calendar (119)



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