Foreign exchange reserves in China declined $99.5bn to $3.23tn in January of 2016, slightly lower than the monthly fall of $107.9bn in December, which was the biggest on record.

The China international reserve number has paved the way for risky assets in the week ahead. Any sign of accelerating outflows will continue to weigh on risky assets, although trading activity will probably remain subdued because of the Chinese holidays.

Major central banks globally are likely to adopt a more dovish stance in 2016. The People's Bank of China (PBoC) may insist that it has no intention to devalue the yuan, but capital flows are putting significant downward pressure on the currency. China's FX reserves are large but far from unlimited, or even sufficient if large capital outflows persist.

The Chinese authorities will likely maintain narrowing capital account restrictions, however, the risk is that the tightening might not be adequate. Our central scenario (65% probability) envisions USD/CNY reaching 6.80 in 2016 in a mostly steady and guarded manner, but there is a large and rising risk (c.35%) that USD/CNY trades up to 7.50 this year.

The volatility should be persistent to locate bids, as the likelihood of an exploitation of the financial turmoil continues to increase. It is worth highlighting that Chinese New Year will take place this week and may keep trading relatively subdued across the region.