###POV: MARKETS SEE THROUGH PBOC'S.........>

CHINA FX: ###POV: MARKETS SEE THROUGH PBOC'S ATTEMPT TO SHORE UP CNY

-Despite today's policy shift signalling the PBoC won't allow the CNY to fall

unabated, options traders upped the ante and have begun to put trades into

position that profit should the CNY weaken further. DTCC data shows the majority

of options bought following the policy change were out-of-the-money calls, with

many larger trades looking for a move to, and beyond, the psychological 7.00

handle as soon as November.

-These trades are in demand despite 3m implied vol touching multi-month highs

and placing a sizeable premium on vanilla calls. As such, knock-out barriers may

be gaining popularity to cut hedging costs (e.g. a 7.10 KO cuts premium by close

to 80%).

-The PBoC's move has already had a short-term impact: USD/CNH pulled lower by as

much as 0.8% initially, but many traders clearly believe this pullback to be

short-lived. The CNH/CNY rate often provides clues for the extent to which

capital outflow is becoming an issue (the rate often moves higher in times of

financial stress) and it hasn't rung any alarm bells yet.