FxWirePro: easing trend in Chinese trade - calendar straddles for USD/CNH and relative value delta hedging for eur/cnh
Source: FxWire Pro - Economic Indicators / 08 May 2017 08:36:25 America/New_York
The Chinese PMIs indicate easing Trend in Trade: China’s NBS manufacturing PMI eased in April, declining to 51.2 from 51.8 in March, which was the highest reading since April 2012. Easing was broad-based across the major components, including output, new orders, new export orders, and employment, while input prices declined further. Meanwhile, the Caixin manufacturing PMI marked a similar trend, easing to 50.3 in April, from 51.2 in March.
While China's trade surplus fell to USD 38.5 billion in April of 2017 from USD 39.16 billion surpluses a year earlier but above market consensus of a USD 35.50 billion surpluses, as exports rose less than imports. Year-on-year, sales grew by 8.0 pct to USD 180 billion, slowing from a 16.4 percent rise in the prior month while market expected a 10.4 pct gain.
Tightening Chinese interbank rates reinforce the soft-landing story.
A steeply upward sloping CNH vol curve in the 3M-1Y segment motivates forward vol selling at a substantial premium to spot ATM vol. The steepness of the vol curve is substantial for the level of base vols (refer above chart) and worth milking via +2M/-9M gamma-neutral calendar spreads in the absence of a liquid forward volatility (FVA) product market.
The flatness of the CNH vol term structure beyond the 1Y point also motivates carry-earning calendar spreads, preferably in the direction of slow-burn currency weakness that is the baseline outcome in the minds of many investors.
For pure vol investors, delta-hedged -9M straddle vs. +18M 25d strangle calendars can exploit this flatness while alongside the cheapness of CNH flies (even adjusted for ATM vol levels) that increase the appeal of short straddle/long strangle packages.
For directional investors not given to frequent delta-hedging, we propose -9M 7.05 vs. +18M 7.15 USD call/CNH put calendars that accrues positively to the over the life of the short leg while awaiting a renewal of RMB weakness, possibly after the November plenum.
Long 3M EURCNH 25D risk-reversal, delta-hedged.
Buy an eq-weighted basket of EURSGD puts, EURCNH puts and EURINR puts, 2M 5% OTMS strikes, vs. sell 2M 5% OTMS EURAUD puts.© FxWire Pro 2020. All rights reserved. The FxWire Pro content received through this service is the intellectual property of FxWire Pro or its third party suppliers. Republication or redistribution of content provided by FxWire Pro is expressly prohibited without the prior written consent of FxWire Pro, except for personal and non-commercial use. Neither FxWire Pro nor its third party suppliers shall be liable for any errors, omissions or delays in content, or for any actions taken in reliance thereon.