Investing.com – Bank of America is watching this pair as it sees potential volatility in the future.
At 07:55 ET (11:55 GMT), USD/CNY was up 0.3% at 7.0849, up 1% over the past week.
“We continue to believe that the upcoming US presidential election scheduled for November 5 and the associated tariff risks pose a risk of asymmetric CNY depreciation,” US bank analysts said in an October 14 note.
The key issue is that the USD/CNY rate of 7.00 will hit a year-end low as China struggles to restore growth momentum and credibility, the bank added.
“Our fair value estimates on both a 3-month and 3-year longer-term basis suggest a fundamental valuation of USD 6.95/CNY,” BOA said. “From this perspective, we believe that maintaining the CNY appreciation below 7.00 against the USD would be counterproductive as it would risk tightening monetary conditions at a time when China is trying to boost economic growth and achieve its target of around 5%. GDP growth.”
As a result, the bank introduced a 1-month call spread (7.20-7.35 strikes) of 27.25 bps with a maximum payout-to-cost ratio of 7.6:1 and a 1-month reference forward of 7.0685 ( Delta 15%).
“1-month implied volatility is elevated at levels similar to the 2020 pre-election month, while tariff risks are significantly higher,” the bank added.
The risk to this trade would be a widespread weakening of the U.S. dollar or a benign U.S. election result that would de-escalate tensions between the U.S. and China.
