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Options Markets on Watch for Further CNY Weakness

CNY
  • The front-end of the USD/CNY implied vol curve hit new cycle highs early in the Tuesday session, with the global equity rout, persistent lockdown pressures across Chinese cities and the commitment of the PBoC to further stimulus putting markets on watch for further weakness across offshore and onshore Chinese currencies.
  • USD/CNY 1m implied vols cleared 8.00 points in overnight trade, the highest rate since the beginning of 2016 and the acute spell of local equity weakness (the Shanghai Composite fell over 25% in a fortnight).
  • Realised vols will be feeding directly into the higher implied prints over the past few sessions, but the Implied/Realised vol ratio has returned to a more normal range after hitting a six year high at the end of April. While this may suggest a more benign backdrop once realised vol mean reverts, the continued run higher in risk reversals suggests a market that is still cognizant of CNY downside risks. 1m USD/CNY risk reversals topped 1.75 points in favour of calls overnight, the highest rate since the first COVID wave in 2020.
  • Moves in currency markets comes ahead of a slew of Chinese data releases in the coming sessions, including money supply, CPI/PPI, industrial production and retail sales figures for April. (See more here: https://marketnews.com/mni-market-analysis-china-liquidity-to-continue-to-rise-but-global-risk-off-leaves-risky-asset-vulnerable )
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