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FXO Market Update - USDCNH on the move

Mathias Alrixon

OTC Derivatives Trading

Summary:  We have seen USDCNH trade higher this week with spot sharply higher after taken out the 6.4000 resistance. Vols and risk reversals have moved a lot higher with 1 month vol up from 3.50 on Monday to trade 5.50 now, 1 month risk reversal is up from 0.75 to 1.45. We think the spot move will slow down and turn in to a grind higher and prefer to buy call spread instead of buying outright calls considering the spike in vol and risk reversal.


Saxo Bank publishes two weekly FX Options Market Update reports covering changes and updates on the FX Options and FX Volatility market. They describe changes in FX volatility levels, risk premium and ideas how to trade based on these.

FX volatility, source Saxo Bank. Vol column: At-the-money volatility for the given maturity. 1w column: Change of the at-the-money volatility for the given maturity over the last week.
Source: Bloomberg, Blue: USDCNH spot, Black: USDCNH 1 month vol

US rates continue to trade higher while China starts to slow down with consensus GDP figures revised lower. We have seen USDCNH trade higher this week, spot started the week at 6.3800 and the break of the 6.4000 resistance had spot accelerate higher with spot trading up to 6.4750 highs today. The next resistance comes in at 6.5000 followed by 6.5800.

The sharp move higher in spot have had vols trade a lot higher. 1 month started the week at 3.50 and now trades 5.50, 1 year is up from 5.00 to 5.50. Risk reversals trades higher as well with 1 month up from 0.75 to 1.45 and 1 year up from 1.25 to 1.55. The whole curve, both ATM vol and risk reversals trades at 1 year highs but around mean levels if we look over at 5 year horizon.

There is more upside in vols short term even after the sharp move higher this week, but we think the move in spot will slow down and turn in to a slow grind higher. With this in mind we think call spreads offer better value than buying outright calls. We think ratio call spreads are good alternative if you go out a bit on the curve as we think the move will eventually will turn in to a grind higher. For shorter dated we prefer to do 1 by 1 call spreads.

Buy 1 month 6.4800 USDCNH call
Sell 1 month 6.5500 USDCNH call
Cost 250 pips

Alternative

Buy 3 month 6.5000 USDCNH call in
Buy 3 month 6.7000 USDCNH call in
Cost 515 pips
1 buy 2 call spread would cost 295 pips

Spot ref.: 6.4700
Source: Saxo Bank
  • The Top/Bottom charts shows the top 5 and bottom 5 values/changes for at-the-money vol, risk reversal (RR) and risk premium of the 45 currency pairs we are tracking.
  • Risk premium: Implied (Imp) minus realized volatility. A positive risk premium means implied volatility trades above realized volatility, i.e. the implied volatility can be seen as “rich”.
  • Change: The difference between current price/volatility and where it closed 1w ago.

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