Market Implied Probabilities Still Suggest USD/CNH Can Breach 7.00 Before Year-End

USD/CNH is threatening to test below 6.8500 as we approach the London/EU cross-over. To recap, today's fixing, was the weakest relative to expectations in USD/CNY terms since early 2020 at -120pips. It also comes after the overnight warning from the onshore FX regulator for local financial institutions around yuan shorts.

• Clearly concern around yuan depreciation is rising amongst the China authorities. Some analysts have stated this may reflect some jitters ahead of Powell's Jackson Hole speech, coming up tomorrow.
• These developments have filtered through into the option space. The table below presents the implied probabilities of USD/CNH touching 7.00 before year end, which is the first column. The second column is the implied probability of being above 7.00 at year end.
• The one-touch probability is down from yesterday's highs, but remains above 50%. We are above levels from last week and also well above levels that prevailed on August-12th. This was just prior to the surprise MLF cut and disappointing July activity data released on August 15th.
• The probability of being above 7.00 at year end hasn't gone much beyond 20%, but we are still comfortably above recent lows.
• Historically, the fixing trend has been used to slow the direction of the CNY rather than alter the trend. The market may still feel relative fundamentals are skewed towards higher USD/CNH levels, particularly with further monetary easing possible from China before year end.

Table 1: USD/CNH Implied Probabilities

Source: MNI/Market News/Bloomberg