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CHINA FX
CHINA FX: ### POV: HEAVY USD/CNY CALL BUYING SHOWS MARKET COGNIZANT OF RISKS
-Currency hedging markets upped the ante on the Chinese authorities this week,
evident in the surge in demand for USD/CNY calls over the past few sessions.
Options markets bought close to twice as many calls than puts this week (a
pattern consistent in each of the past five sessions).
-Despite the uptick in realised volatility, hedging costs remain relatively low
compared to recent months. USD/CNY 3m calls positioned to benefit on a break of
Cny7.00 cost just under 170 USD pips at writing, breaking even at approx.
Cny7.08. To trim the up front cost and bring the break even point lower, adding
a Cny7.20 knock-out barrier cuts the premium to approx. 40 USD pips to break
even at Cny7.0140.
-This follows MNI reporting that Chinese authorities have begun to indicate that
they may allow USD/CNY to break through their implied tolerance band of Cny7.00.
In the subsequent sessions, USD/CNH has rallied to touch multi-year highs, with
markets eyeing early-Jan 2017's best levels of Cnh6.9895.

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