PBoC in a working paper released yesterday attributed the weakness in China's exports to the strengthening of the CNY's real effective exchange rate (REER).

On a year-to-date basis, China's exports has contracted by 2.6% y/y as compared to a 5.6% gain over the same period last year.

To substantiate its conclusion, the researchers noted that its external demand index has held steady since the middle of 2014, while export growth had turned negative.

It added that maintaining a relatively stable CNY trade-weighted exchange rate would be more supportive for exports going forward.

The findings follow PBoC's suggestion last Friday that referencing the CNY exchange rate to a basket of currencies would be more practical, rather than solely basing it against the USD.

Mostly, we could foresee these as a signal that China intends to weaken its currency against the USD in light of a likely stronger USD environment.

Hedging perspectives:

We could still see further weakness in CNY/CNH exchange rate in the foreseeable future.

We reckon that recently happened downgrade to sub-investment grade by Fitch and Moody's, S&P downgraded the country's to junk the investment status was proven to be true while observing the shrink in exports.

On the external front, we also forecast USD/CNY weaker to keep pushing USD/INR higher, the INR may hang around 66 trajectories to control further its depreciation.

Hence, it is recommended to buy either 3M USD/CNY forwards of march expiries.