Investing.com – Bank of America takes a look at the pair and sees potential volatility ahead.
At 07:55 ET (11:55 GMT), USD/CNY was trading 0.3% higher at 7.0849, up 1% over the past week.
“We continue to believe that the upcoming Nov. 5 U.S. election and associated rate risks pose asymmetric depreciation risk to the CNY,” U.S. bank analysts said in an Oct. 14 note.
Key point is that USD/CNY 7.00 provides a bottom at year-end as China struggles to restore growth momentum and credibility, the bank added.
“Our fair value estimates on both a three-month basis and a longer-term three-year basis indicate a fundamental valuation of USD/CNY 6.95,” BOA said. “From this perspective, we believe it would be counterproductive for the 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 boost growth and wants to achieve its target of approximately 5%. GDP growth.”
As a result, the bank arrived at a call spread of 1M (7.20-7.35 strikes) for 27.25 basis points with a maximum payout to expense ratio of 7.6:1 and a 1M forward reference of 7 .0685 (Delta 15%).
“Implied volatility of 1 million euros has been increased to a similar level to the period leading up to the 2020 elections, while rate risks are significantly higher,” the bank added.
The risk to this trade would be broad-based USD weakness or a favorable US election outcome that aims to de-escalate US-China tensions.
