FX View From a London Trading Desk

February 28th, 2014 1:23 pm | by John Jansen |

Some interesting thought from a London FX trading desk. The dealer did not wish attribution so I have edited slightly and hopefully it is now cloaked in anonymity.

Watch out for the odd events this weekend! Especially in China…

We have heard from others and agree with the idea that there is a strong likelihood that the USDCNY band-widening announcement from +/-1% towards +/-2% could be announced over the weekend.

Here’s what we think should happen in USDCNH spot from what we have seen trading lately:

1)As USDCNH approaches 6.13 from the lower side, sell side books get increasingly short spot but long vol. The hedging activity hence is to buy USDCNH and sell vol.
2)As USDCNH moves from 6.13 towards 6.20, books get continue to get long vol but neutral spot. The hedging activity here is to sell USDCNH vol. We are likely in this range for some structured products and hence buy side hedging activity in USDCNH seems to have eased while linear positioning adjustment continues.
3)Beyond 6.20 however books get short vol through a digital knock in of customer liability but neutral spot. This territory is feared to see panic buying of vol’.
Onshore CNY tumbled by the most on record on speculation the central bank will widen the currency’s trading band, allowing greater volatility at a time when growth is slowing in the world’s second-largest economy. It plunged as much as 0.85 percent to a 10-month low of 6.1808 per dollar in Shanghai, the biggest intra-day drop in China Foreign Exchange Trade System prices going back to 2007.
The onshore fixing was set at 6.1214 so a touch lower than expected, while the 0x1 NDF points traded at +50 against +85 yesterday. PBOC was seen buying, causing relative buying in the NDF space, with 1 year taken from 6.1495 to 6.1580 highs. The 1 x 12 steepened to +230 levels.
In the CNH market: PBoC the spot cnh taken from 6.0965 up to as high as 6.1335, before retracing to current 6.1265 levels. The 1 year points were taken at +525, before the higher spot caused it to come under pressure from options selling, collapsing to +490. A large HF was sniffing around for June/June IMM rolls again in large, seems like a buyer as he was a buyer yesterday as well in this particular roll.
Recent SAFE report ‘Summary of cross-border RMB flows of 2013’ is attracting a lot of retrospective attention following this move. Please ask if you would like full details.
Probably due to that move all USD/Asia bounced higher overnight in Asia despite a lot of bullishness yesterday in NY. Nothing too massive though. In fact 1s USDKRW is slightly lower at 1068 (despite 4 missiles being launched from North Korea). Asia has been paid by offshore prop name $40 million around spot 1066.6 – 9 equivalent.
We are still short smalls 1s USDCNY but will probably square it before tonight as events like a band widening generally happens on Fridays after US market closing.
Finally this morning we had  monthly EM investor survey on sentiment and positioning for February. The results showed that a majority of EM investors are bullish on GEM which is exactly what I was trying to explain yesterday: market makers and short term prop accounts seem to be running long US$ when HF and RM community are already bullish EM mode. That could explain why this market is behaving so much like a headless chicken also. Specifically, 63% of total investors produced a bullish-bias answer for the 2-week horizon, while the population of bearish investors stood at only 28% of the total.
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