Barclays trade idea for the week ahead: Buy USD/CNH call spread

With PBoC showing inclination to slow the pace of depreciation in the CNY, we expect CNY/CNH vols to fall after the sharp spike last week. Given our forecast of USD/CNY rising to 6.80 by year-end, we recommend buying a 4-month USD/CNH 1×1 call spread, with strikes at 6.5147 (ATM) and 6.80 for the upper and lower strikes of the options structure, respectively. The option structure costs 0.914%, with a potential maximum gain of 4.38% should spot USD/CNH end the year between 6.5147 and 6.80. Should spot USD/CNH fall below the ATM strike, the maximum loss is the cost of the option structure of 0.914%. This implies a max-profit to max-loss ratio of close to 3.8 (note that prices here are indicative).

From a technical perspective, the break above the range highs near 6.3025 has made us more bullish USD/CNH for the coming weeks and months. Extrapolating price projections from the multi-year USD/CNY chart we are looking for an initial move towards the 6.6400 area. Beyond there we see room towards technical targets near 6.7900, approximately 5% above current levels.

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