Currency traders place cheap bet that Trump and Xi could reach a truce

[NEW YORK] Currency traders aren't ruling out the prospect that the highly anticipated meeting between US President Donald Trump and Chinese leader Xi Jinping this weekend will deliver a trade truce.

One-week dollar-yuan risk reversals touched the lowest level since June on Monday, signalling that markets are positioning for the possibility of a stronger Chinese currency in the aftermath of the Trump-Xi meeting at the Group of 20 summit. The yuan has slumped about 6 per cent against the greenback this year as trade friction between the two countries escalated, pushing the onshore yuan toward the key mark of 7 per dollar.

With one-week implied volatility in the pair well below 2018 highs, purchasing yuan calls offers an inexpensive way to wager that the leaders will find common ground, according to Jefferies LLC.

"It's a relatively cheap bet because yuan vols are not that high," said Brad Bechtel, head of foreign-exchange at Jefferies. "Even just a sign that they are on a path to some sort of agreement will likely be read as positive initially.

"The meeting comes before the US is scheduled to step up tariffs on US$200 billion worth of Chinese goods as of the start of 2019, to 25 per cent from 10 per cent currently.

Implied volatility is also on the rise in the Australian dollar, with the one-week tenor hitting the highest level since February against the dollar on a closing basis. Signs of progress out of the Trump-Xi meeting should benefit the currency, given the close ties between the Australian and Chinese economies, according to Mr Bechtel.

"The Aussie dollar is ground zero for Trump-Xi and trade in my opinion," Mr Bechtel said. "Vol remains elevated, so that's a sign that markets are still hedging ahead of the event."

BLOOMBERG