Standard Chartered is advising investors to buy a one-year at-the-money U.S. dollar offshore Chinese yuan forward, while selling a one-year USD onshore Chinese yuan ATM forward. The trade is designed to take advantage of the perceived erratic and unpredictable recent currency fixes of CNY posted by the People’s Bank of China.
Investors should buy the USD/CNH forward at 3.15 vol and sell the USD/CNY forward at 2.95 vol, according to the firm. The USD/CNH strike should be .61% above the USD/CNY strike, with a 2.34% premium expected, analysts at StanChart said.
Investors have long come to consider a continued appreciation of CNY, but the erratic price fixing this year from PBoC has caused investors to rethink their fx strategy. The fixing trend has driven many corporate investors to use non-deliverable CNY forwards over CNH options for hedging purposes (DI, 12/1).
“A lack of clear direction in the USD/CNY daily fixes in early 2012 has contributed to a broad-based slide in implied volatilities in the twin offshore options markets--the non-deliverable/cash-settled options and the deliverable USD/CNH options,” said an analyst at StanChart. “The March slide in USD/CNH one-year ATM forward implied vols was reinforced by corporate supply, and at one point these traded on a par with USD/CNY NDF one-year ATM forwards. We see fundamental relative value in USD/CNH options against USD/CNY NDF options.”
The analyst said the straddle is cheap insurance against new market turbulence, with favorable carry or roll-down conditions. “The overall package will expire with a net profit if our forecasts for both USD/CNY and USD/CNH are correct,” he said. “Given our forecast trajectory for USD/CNY, the biggest risk to the strategy is that USD/CNH underperforms USD/CNY by more than is priced into the forwards.”
Spot USD/CNH was 6.2980 and USD/CNY was at 6.3066 at press time.