Investing.com – Bank of America takes a look at the pair, seeing potential volatility ahead.
At 07:55 EDT (11:55 GMT), the USD/CNY was trading 0.3% higher at 7.0849, up 1% over the past week.
“We continue to believe that the upcoming US elections on November 5 and the accompanying tariff risks pose an asymmetric depreciation risk for the Chinese yuan,” analysts at the US bank said in a note dated October 14.
The key point is that the US$7.00/CNY rate represents a floor until the end of the year as China struggles to regain growth dynamics and credibility, the bank added.
“Our fair value estimates on a 3-month and 3-year long-term basis suggest a base valuation of US$6.95/CNY,” the BoE said. “From this perspective, we believe it would be counterproductive for the Chinese yuan to maintain a rise below 7.00 against the US dollar, as this would risk tightening monetary conditions at a time when China is trying to stimulate growth and achieve its target of around 5%. GDP Growth Total.”
As a result, the bank entered into a 1 million call spread (7.20-7.35 strike) for 27.25 basis points with a maximum pay-to-cost of 7.6:1 and a 1 million forward reference of 7.0685 (15% delta).
“Fund-implied volatility is elevated at levels similar to the 2020 one-month pre-election period, while tariff risks are much higher,” the bank added.
The risks to this trade are widespread US dollar weakness or a benign US election outcome that seeks to calm US-China tensions.