CNY: Mild Weakness Before Strength (2)
Falling inflation and weak trade
data continue to reinforce our view that both domestic and external demand
remains sluggish and could add further downward pressure on the Renminbi for
1H. We recommend buying USD/CNH on dips as a tactical trade to express our
near term view for Renminbi weakness. |
We view the 50bps RRR cut more as
a move to ensure adequate liquidity in the system, rather than an outright
monetary easing to stimulate growth. We still expect (1) PBoC to continue to
use the mid-point tool to guide exchange rate; (2) A lending rate cut and
another RRR cut but likely to come after Chinese New Year holidays.|
Our medium term view for
Renminbi to gradually regain some strength from 2H 2015 remains unchanged.
We believe concerns we highlighted will eventually dissipate as reforms take
shape and economic rebalancing results become more evident. We
see value entering into a zero-cost option strategy: buying 1-year USD
put/CNH call with strike at 6.25 for cost of 39bps; and selling 6-month USD
call/CNH put with strike at 7.00, receiving premium of 39bps. |
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