USD/CNH: Forex Volatility on the Rise as Trade War Risk Lingers

USDCNH, CURRENCY VOLATILITY JUMPS WITH TRADE WAR UNCERTAINTY

• The Chinese Yuan was pegged at 6.9996 per US Dollar by the PBoC early Wednesday; a mere 4 pips shy of the “taboo” 7-handle threshold
• USDCNH overnight implied volatility of 9.13% could be underpriced
• Check out the Top 10 Most Volatile Currency Pairs and How to Trade Them

Two weeks ago we highlighted how US China trade war tension could rise and stir currency volatility. Now, we are seeing the expected development unfold following the latest threat by US President Trump to levy additional tariffs on Chinese goods this past Friday. In response, the PBoC devalued the Chinese Yuan significantly aiming to offset the impact on their economy, but spooked currency traders and equity investors alike in doing so.

Spot USDCNH subsequently surged above the ‘tabooed’ 7.0000 price level as market uncertainty ran rampant which propelled a widespread selloff in risk assets and jump in several measures of volatility. Selling pressure has since stabilized with USDCNH coming off its intraday high of 7.1400 on Monday with spot prices currently trading at 7.0850. As spot USDCNH receded, so has the currency pair’s implied volatility readings.

USDCNH PRICE CHART: DAILY TIME FRAME (OCTOBER 23, 2018 TO AUGUST 07, 2019)

USDCNH overnight implied volatility has drifted from 12.16% earlier this week to 9.13% today, but remains considerably higher than the average reading of 4.52% over the last 12 months. However, the implied volatility reading does seem peculiarly low seeing that no positive development has been made on the US China trade war front since the spike. Moreover, the risk of further intervention from the PBoC or retaliation by Chinese President Xi looms.

That said, spot USDCNH is calculated to trade between 7.0512-7.1188 with a 68% statistical probability using the overnight implied volatility reading of 9.13%. Although, the aforementioned implied trading range for spot USDCNH could be breached if its overnight implied volatility is in fact underpriced by currency option traders. As such, USDCNH price action could be exacerbated – particularly when looking to the upside – if stops get blown out around this technical level which would likely be sparked by another escalation in trade war tensions or further weakening in the Chinese Yuan by the PBoC.

-- Written by Rich Dvorak, Junior Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight