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Macro and Vol Commentary

China’s recovery has been relatively strong due to expansive stimulus measures, however, trade tensions between China and the US hamper risk appetite. But what is next?

China’s recovery

  • All aggregate financing in China has been above 3trn yuan every month this year except for February.
  • June all aggregate financing was 3.43trn yuan
  • The PBOC injected 50bn yuan into the market, causing the overnight repo rate to fall, this brought total injections to 380bn yuan since July 13th
  • The PBOC reduced the 7-day repurchase agreement to 2.2%
  • After being cut significantly in the Q1, the 1yr and 5yr loan prime rates have remained steady in recent months suggesting a pause. This allows the PBOC to drop rates later on in the year, giving them options
  • The money supply is up y/y with M0, M1, M2 up 9.5% y/y, 6.5% y/y, 11.1% y/y respectively in June
    • New yuan loans were up 1.8trn yuan in June
  • Economy data has recovered well in Q2, GDP returned to growth of 3.2% y/y, the YTD y/y figure is still negative at -1.6%
  • Industrial production was also positive in June at 4.8% y/y; retail sales declined by 1.8% y/y
    • Fixed assets ex rural investment YTD was -3.1% y/y
    • Property Investment YTD y/y was up in June at 1.9%
  • The property market is starting to recover, and sales in the top 30 cities have been particularly strong.
  • There are question marks around office space and also mall vacancies, but the residential market is expected to lead the way in H2 2020
  • Private investment is behind the curve and at -9.6% y/y in May, this is an improvement on the recent low of -26.4%, private funds are less likely to be released until there is greater certainty in the economic outlook. However, we still expect this to return to positive growth
  • The trade balance was $46.42bn in June, which was under expectations of $59.60bn and the previous month at $62.93bn
  • Both imports and exports improved on the month to 2.7% and 0.5%, respectively but the export market remained historically weak. As the export market improves, this would also strengthen CNH
  • The trade tensions have not had impacted the currency too much in the last month, with USDCNH moving into 6.99 from 7.20
  • However, these tensions escalated further today after the U.S. order CHina to close its Houston consulate. China responded saying this was an 'unprecedented escalation and a violation of International law. This reduced risk appetite in financial markets.
  • Donald Trump has lost ground in the Presidential election race, and we expect him to return the America first, protectionist rhetoric to try and get voters back onside. This could increase tensions and prompt nervousness in the market
  • The recent rally in the Chinese equity market could have prompted strong inflows into China which helped CNH strengthen
  • As economic activity recovered in Q2, we expect this to remain the case for Q3 which should help flows for CNH. 11 out of 31 provinces showed strong economic improved in H1 vs Q1 2020. 7 of these 11 showed positive y/y growth; this suggests that corporate activity will be strong in Q3

USDCNH corrected to the downside, and we could see this trend continue in the near term as the economic performance starts to diverge. The US is having to increase restrictions due to rising COVID cases, whereas China is firmly on the road to recovery. Stimulus measures have fuelled gains in asset prices, and the vast majority do not reflect the underlying economic situation. Currency flows away from the dollar have been a trend in recent months and with China in a better position economically, as well as the strong rise in equity and industrial assets has prompted demand for CNH. This will likely increase as China’s export markets to continue to recover. The major headwinds remain trade tensions with the US, EU, and the UK. China’s handling of Hong Kong has prompted a reaction from the outside world, and this is a trend to watch. President Trump’s presidential election campaign will likely prompt protectionist rhetoric, and relations have definitely worsened since the Phase 1 deal in January.

Volatility Commentary 

Since mid-March, as with most Macro FX vols, we’ve seen USDCNH vol come off and notably seen USDCNH volatility realise lower than recent implied. With most World Governments right now being focused on their own domestic re-openings and post CV19 economic recovery and stimulus packages, the US-China trade war (a major driver of USDCNH vol over the last year and a half) takes second priority. Despite recent China headlines (Hong Kong/Huawei/Xinjiang/and today’s US-China Consulate spat), we expect vol to continue realising lower than implied in the short term, but as we get closer to the US election and the US President looks for re-election we see the potential for US-China tensions to come to escalate much further in Q4 especially if the US can get other countries on board, such as the UK which has already recently upped is criticism and taken actions on China. We favour calendar structure, short 2-3month expiries and long circa 5-6month expiries which are net slightly short vega/gamma and that benefit from USDCNH spot rising towards year-end.

USDCNH Trade Idea

  • Sell 7.5m USD notional 2-month expiry call option with strike 7.050 for premium circa 49k USD
  • Buy 10m USD notional a leg 5-month expiry call spread with 7.1000 and 7.200 for circa premium 41k USD
  • Overall premium is circa receive 7k USD

Charts and Tables

Technical Charts 

JP Mogan Global FX Volatility Index

The index has weakened in recent weeks as selling pressure has been robust and triggered losses through support at 7.50 to 7.23. The stochastics are falling further into oversold, and the MACD diff is negative and softening. Momentum is on the downside and we expect this to remain the case in the near term. The bearish candles suggest lower prices and the rejection of key resistance levels helps to affirm the trend. We could see the index consolidate above 7.20 before another leg on the downside through 7. On the upside, the index needs to regain a footing above 7.60 in order to regain upside conviction but we expect the trend to remain on the back foot.

Dollar Index

The index has remained on-trend in the last week, repeated selling pressure and rejection of the 50 DMA has promoted a break of support at 95.648. The indicators are negative and on the back foot, the MACD diff is negative but has started to converge suggesting improved buying pressure. The stochastics are also improving and to confirm the buy signal, the index needs to close above 95.648 and then target the 50 DMA at 96.094. The index has failed into the 50 DMA in recent weeks and we expect this to remain the case. The bearish engulfing candle suggests breakthrough support at 95.2 in the near term, to confirm the candle the index needs to break this level then target the 100% fib level at 94.650.


The pair has weakened after rejecting 7.20, with selling pressure prompting a break of support. The reaffirmation of resistance has affirmed the trend, but the stochastics and MACD diff have turned positive and are diverging on the upside suggesting an improved outlook. To confirm the bullish engulfing candle and the spike from the indicators prices need to break above the 100 DMA and then hold above this level. Lack of appetite for prices above the 50DMA has prompted a sell-off in recent weeks and if we see another rejection of the 100 DMA we could see prices breakthrough 6.95 towards 6.90 in the longer run.



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