In view of analysts at ING, any agreement between the US and China on the need to keep the renminbi stable could reduce the tail risk of a competitive devaluation in the renminbi.
Key Quotes
“Again, Washington is more interested in its trade deficit with China (and the USD/CNY bilateral rate), than it is about an IMF-style need for a clean float in the renminbi.”
“The FX options market is well on the way to pricing lower tail risk of a CNY devaluation, where the CNY smile curve now shows much lower implied volatility levels for low delta USD calls/CNY puts.”
“Stability in USD/CNY and lower levels of volatility should be positive for Asian FX. Were the USD/CNY stability story to develop, CNY realised volatility could actually drop back (e.g. 3m USD/CNY realised volatility to 3% from 4% currently) helping Asian FX volatility lower across the board.”
“Such a trend could be beneficial for risk-adjusted carry trades in Asia. This environment could see the Indonesian rupiah outperform its steep forward curve (where implied 3m yields through the Non Deliverable Forward are still a high 7.3%).”
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