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CHINA YUAN: ###POV: USD/CNH TOPPING 6.85 OPENS DOOR TO FURTHER LEG HIGHER
-USD/CNH's near 10% rally since late March has seen the rate top 6.85 for first
time since June 2017. The move has been supported by the continued narrowing of
the US-China 2yr yield spread which, having fallen below 40bps today, sits at
its narrowest since the Global Financial Crisis. Options traders are hedging for
deeper declines: the fresh YTD highs in USD/CNY brings the pair within reach of
sizeable USD/CNY call option strikes layered between 6.85-6.90. Furthermore, the
put/call ratio of hedging trades placed since July 1st is skewed heavily toward
calls by almost 2:1, according to DTCC data.
-MNI source reports also suggest Chinese authorities are willing to become more
activist in protecting domestic GDP targets (see: MNI SOURCES: China Policy
Moves Pro-Growth as Economy Sputters (24/07/18)) and so are unlikely to combat
the weaker exchange rate while the decline remains orderly and within their
implied tolerance band.
-RISK: USD/CNY's trajectory remains heavily exposed to political risk, with both
Trump and Treasury Sec Mnuchin claiming they're 'watching' the weakening CNY.