USDCNH continues to be a favored strategic vol short that we are willing to hold through event risks this month.

The rationale for the trade has not changed since initiation – faith in the PBoC to engineer orderly, low vol depreciation of the renminbi, and the judgment that tail risks of a 2015- style devaluation shock have declined given the credibility of the basket framework.

A more advanced corporate deleveraging process for offshore borrowings and scope for bond inflows on the back of potential CGB inclusion in major bond indices. It is true that capital outflows have picked up in July and August, and some of the event driven tactical considerations (G20, SDR inclusion) that might have forestalled more aggressive CNY weakening are either behind us or will be in short order.

Whether that is enough to necessarily spark an uptick in CNH volatility is far from clear, because it is an EM currency in the unique position of having a widespread short investor base that should struggle to implode absent a policy accident, and in any event, the familiar response of PBoC's CNY fixings to exogenous market shocks, if any, is to lean strongly against the wind that should contain realized volatility.

Proof of the pudding is that hourly realized vol of 1M CNH forwards has remained contained around a measly 2.7% over the past two weeks (vs. 3M ATM @ 6.0) despite this week's sharp squeeze higher in points.

Buy USDCNH 1y Seagull strikes 6.55/6.85/7.20 Indicative offer: 0.38% (vs 0.78% for the call spread strikes 6.85/7.20, spot ref: 6.6817)

Rationale: USDCNH higher highs and higher lows, the next wave of RMB depreciation would see USDCNY trade in a likely range of 7.00-7.20 by mid-2017 (the Q2 2017 point forecast is 7.10).