USD/CNY risk reversals at 3.5-month low, signal CNY strength

One-month 25 delta USD/CNY risk reversals (CNY1MRR) fell on Monday to the lowest level since the end of August, indicating that investors are likely expecting a pullback in the USD/CNY and hence are seeking a downside protection (USD/CNY puts).  

The risk reversals gauge currently stands at -0.05, the lowest since Aug. 29.  Risk reversals are a gauge of investor expectations for a currency's direction and are used to hedge against expected moves.

The negative print indicates greater demand for put options  – derivatives that give investors the right to sell an asset. On the other hand, a positive risk reversals number indicates greater demand for calls  – options that give investors the right to buy the asset.

The drop in the risk reversals from the Oct. 26 high of 1.025 to -0.05 represents a bullish-to-bearish trend change in the USD/CNY options market.

CNY1MRR