Macro and Vol Commentary
- China's economy is currently struggling with the outbreak of COVID-19
- The rising number of cases and the nationwide zero-covid policy meant that more than 70 cities had been partially or fully shut down in the last couple of weeks
- As a result, the production activity plummeted in major manufacturing hubs
- IHS manufacturing PMI saw a sharp decline in activity already in March
- The index declined from 50.4 to 48.1; while marginally contractionary, it is the lowest level since February, when it was at 40.3
- Suppressed production activity due to lockdowns, but also increased prices due to the crisis in Ukraine led to a sharp decline in output and new orders
- We expect the April level to be on par with the February level as lockdown conditions worsened
- Moreover, strict lockdown conditions in Shanghai meant that one of China's biggest ports saw the container wait times nearly tripled to 12.1 days in a matter of weeks
- Chinese port activity already fell below levels seen during the first COVID-19 outbreak, according to satellite data from SpaceKnow
- As a result, the PBoC has taken some measures to offset these negative factors
- On April 15, the central bank announced a 25bps reduction in the RRR rate for commercial banks
- This was following a 50bps in July and December
- More recently, as a result of prevalent currency weakness, China cut the amount of money that banks can have in the FX reserves
- Indeed, we saw the currency deceleration stall following the news
- Moreover, the central bank vowed to increase monetary support to the real economy, especially for industries and small businesses hit hard by the pandemic.
- Market response to this was positive albeit muted, suggesting that the investors remain hesitant about the effectiveness of such moves amidst deteriorating lockdown conditions
- At the same time, the scope for China's easing continues to diminish as the Fed's aggressive tightening cycle approaches, creating little space to manoeuvre the trajectory of future policy decisions
- In fact, according to the IIF, foreign investors are rapidly withdrawing capital from China, putting downward pressure on the renminbi in the medium term
- The European economy is also seeing a moderation in growth performance
- In April, consumer confidence remained negative at -16.9
- Manufacturing PMI fell to 55.3 from 56.5 in April
- In the meantime, inflation in Europe is converging with the US, as it grew by 7.5% y/y in March, the highest since the creation of the Eurozone
- Energy prices were up 44.7% y/y
- Core prices were up a more modest 3.0% y/y and 1.2% m/m
- The risk to economic performance is particularly acute if the bloc decides to ban the import of oil and gas from Russia
- Indeed, while reliance on its imports is reducing following warmer weather, still, 40% of Germany's gas needs rely on Russia
- Europe has been increasing its energy shipments into reserves to stockpile ahead of the colder weather later this year
- According to Bloomberg, shipments of diesel-type fuels are expected to jump to 1.45m bl/d, the highest since August 2019
- Flows from Russia will account for 43% of April total, vs the last year's average of 56%.
- However, it seems that the bloc would need to use these reserves sooner than expected
- Russia halted shipment to Bulgaria and Poland, whose deadline for paying in rubles has expired
- This puts into question whether Russia will follow through with this strategy in relation to other major economies, the deadlines of which are approaching in May
Source: European Commission, S&P Global, Eurostat, Bloomberg
- With inflation accelerating sharply in March, there was the expectation that the ECB would speed up the process of monetary policy normalisation. However, this has not taken place.
- The central bank decided to retain its plans for a gradual easing of asset purchases, and while it has brought the date of the first rate hike forward into July, it is still months behind the Fed
- However, it is possible that by the time they decide to hike, the inflation will not be growing as aggressively, therefore making the ECB not hike as much and erode so much of the growth
- In the meantime, the ECB is committed to ending asset purchases later this year, and an emergency tool is in the works that should help if yields continue to rise.
In comparison to USDCNH, EURCNH reacted softer to Chinese lockdowns, which could be attributed to relatively weak appeal for both economies vs the US. The Chinese economy is slowing rapidly, and April economic indicators should confirm this. Therefore, in the meantime, the country's economic performance will highly depend on its approach in regards to the zero-covid policy and how it chooses to restrict manufacturing activity in the economy. Indeed, in the past, we have seen China relax the rules for factories in order to ensure resumed operations. However, the number of cases is nearly ten times that of the peak in 2020. Europe remains vulnerable to geopolitical tensions and growing concerns surrounding energy supply. Inflation continues to grow rapidly, and the ECB is yet to begin announcing the start date of the hiking cycle. News of further lockdown conditions will send the yuan lower, however, as of now, support from the central bank is propping up the currency. Support at 6.86 should remain intact in the near term.
Offshore Yuan rally lost momentum since the start of April, amid a new wave of Covid and concerns over a slower economic growth. In fact, Beijing’s zero-Covid policy is expected to result in a deterioration of the Chinese economic outlook, and thus weigh negatively on CNH. On the other hand, persistently high inflation in the Euro area is also generating pressure on Euro. Nevertheless, the divergence in the monetary policy stance of the ECB and BoC - with the BoC way more dovish than ECB – might prompt volatility up in the short term. This has recently manifested in a stronger Euro and a pick-up of options’ 1-month realised volatility when compared to the implied. All in all, we favor buying rally in EUR and volatility.
EURCNH Trade Idea
- Trade idea in 1-month (Exp 09/06/2022)
- Sell EURCNH Put, Strike 7.1, KI Barrier 6.9 in EUR 2.5mio – Rec EUR 6K circa
- Buy EURCNH Call, Strike 7.2, in EUR 7mio – Pay EUR 15.6K circa
- Total structure net pay EUR 9.6k.
USDBRL NDO Positioning Data 13/04/2022 - 20/04/2022
Trading for USDBRL NDO showed a wider range in the week to April 27th, the majority of options were puts. We saw the lower end of the range decline into 4.40, the higher notional values suggest conviction on the downside. There is upside cover but few calls traded, the majority of call options are traded up to 5.20 with some small calls traded towards 5.40. We see more conviction in the market in May. The majority of put options are below spot, the correction in the spot market has prompter more upside cover but we expect more downside cover.
USDBRL NDO Positioning Data 20/04/2022 - 27/04/2022
USDCNY Vanilla Positioning Data 13/04/2022 - 20/04/2022
There were considerably more options traded in the week to April 27th, there has been a considerable shift in sentiment in recent weeks. The majority of options traded were calls and are above the market. USDCNY is strengthening and the market is expecting this to continue through to September. There are few puts traded in the immediate term, however there is an increase in volumes in May but following that, there is considerable amount of calls with an increasing strike.
USDCNY Vanilla Positioning Data 20/04/2022 - 27/04/2022
EURCNY Vanilla Positioning Data 27/02/2022 - 27/03/2022
Option volumes declined in the month to April 27th, the range was narrower and there was significantly less upside calls traded. The narrow range indicates less conviction, as well as the low notional value. This indicates the market expects prices to consolidate in the immediate term.
EURCNY Vanilla Positioning Data 27/03/2022 - 27/04/2022
Charts and Tables
Historical Spot FX Volatility (30D Rolling)
FX Matrix (today)
Key Events & Releases
JP Morgan Global FX Volatility
The index has improved so far in May and has breached resistance at 11.00, and now stands at 11.06. The stochastics are falling but are highly oversold, but the MACD diff is negative and diverging, suggesting we could see the index push lower in the near term before the change of trend. The index needs to hold above 11.00 before targeting 11.41. The reaffirmation of near term support at the moving averages suggests we could see the market push higher. On the downside, rejection above 11.40 could trigger a break of support at the 50 moving average at 10.88 before 100 MA at 10.19. Ascending triangle formation appeared in the last couple of weeks, but the indicators point to the index being oversold. If it holds above the 50 MA, we could see further upside in the near term.
The dollar index has been gaining in recent weeks, but resistance at 104 prompted the index to trade at 103.69. However, the prices have also struggled to break below the support of 50 MA at 103.50, causing the recent session’s trading range to narrow. The stochastics are showing signs of convergence on the upside, and the MACD diff is negative and converging, suggesting we could see prices edge back to the 104 level. If this resistance is breached, we could see significant upside momentum to 105 before 106.50. On the downside, if support around the 50 moving average does not hold firm, this could trigger losses back through 102.93 and target 100 MA at 102.58. The most recent narrow trading range and indicators suggest we could see the index gain footing in the near term.
The pair has been gaining ground in recent weeks, prompting a breach of the 7.10 resistance level. However, the market has struggled to break above the 7.15 and so remained range-bound this week at 7.11. The stochastics were about to converge on the upside, but downside momentum prevailed, and we saw stochastics diverging further down. The MACD is negative and began to diverge once again, suggesting that we could see the index break back below the 7.10 support, with a downside target of 50 MA at 7.06 in the near term. On the upside, if the near term support holds firm, this could trigger gains back through the resistance of 7.15 and target 7.1578 – the recent highs. The indicators suggest we could see the pair edge lower in the near term.