Exactly a year ago, USDCNY was trading at 6.3180 (Nov’2015) that’s when (November/January 2015) the pair saw a sharp fall by the Yuan, but since April, the tactic has shifted to a slower move that has ruffled remarkably few global feathers and thereafter, carried it’s rapid spike (it reached 6.7 mark in July 2016).

For now, the capital outflow pressure has intensified significantly since Q3. Given the large domestic money stock that is still growing much faster than nominal GDP, as well as the increasingly stretched valuations of many domestic assets, it is going to be an uphill battle for the PBoC to retain controls over the speed of currency adjustments.

The Chinese policymakers will tighten capital controls further, which may be enough for the PBoC to manage the depreciation pace for a while longer.

We anticipate the several lines of imminent actions on outward FDI, major shadow channels, and banking flows.

The base case consequence envisages USDCNY mounting to 7.30-40 by the end of H2’2017, reassessed up slightly from 7.20 a few weeks ago.

However, we advise monitoring a set of data closely to gauge for any sign that the PBoC may be losing, or giving up, the battle.

Fx Option Trades:

We recommend buying a 6m USDCNH zero cost seagull structure (6.80/7.18/7.50 strikes) to capitalize on further RMB depreciation and based on escalating probabilities of a free-float we recommend owning a 1y USDCNH call spreads as well (7.8/8.40 strikes).

For investors who are insensitive to liquidity constraints over the next 12-18 months, a three-year call spread should be considered.