Bank of America takes a look at the USD/CNY pair, seeing potential volatility going forward.
At 07:55 ET (11:55 GMT), USD/CNY traded 0.3% higher at 7.0849, up 1% over the course of the last week.
“We continue to believe that the upcoming November 5th US election and attendant tariff risks pose an asymmetric depreciation risk to CNY,” analysts at the US bank said, in a note dated Oct. 14.
A key point is that USD/CNY 7.00 presents a floor into year-end as China grapples with restoring growth dynamics and credibility, the bank added.
“Our fair value estimates on both a 3-month basis and longer-term 3-year basis suggest a fundamental valuation of USD/CNY 6.95,” BOA said. “From this perspective, we think it would be counter-productive for CNY to sustain an appreciation below 7.00 against the USD, as this would risk tightening monetary conditions at a time when China is trying to stimulate growth and achieve its target of about 5% GDP growth.”
As a result, the bank entered a 1M USD/CNH call spread (7.20-7.35 strikes) for 27.25bps with a maximum payout to cost ratio of 7.6:1 and a 1M forward reference of 7.0685 (Delta 15%).
“1M at the money implied volatility is elevated at similar levels to the 2020 1-month pre-election period, while the tariffs risks are substantially higher,” the bank added.
The risk to this trade would be broad based USD weakness or a benign US election outcome which seeks to de-escalate US-China tensions.
