###POV: USD/CNH TOPPING 6.85 OPENS.......>

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.