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  • The USD/CNY risk reversals have shed call (bullish) bias.
  • The action in the CNY options validates the topping pattern in the USD/CNY.

The USD/CNY one-month 25 delta risk reversals (CNY1MRR) gauge, which shows the implied volatility premium for CNY puts over CNY calls, has dropped sharply in the last two weeks.

At press time, the risk reversals are being paid at 0.05 CNY puts vs 1.02 CNY puts on Oct. 26. Clearly, the implied volatility premium or the demand for the cheap out of the money CNY puts (bearish bets) has dropped sharply, validating the signs of a bullish invalidation in the USD/CNY daily chart.

At press time, the USD/CNY is trading at 6.93, having defended the 50-day simple moving average (SMA) last week. A break below that level my boost demand for the CNY calls, pushing the USD/CNY risk reversals below zero.