Further CNY weakness, buy USD/CNH call spread

The market continues to take stock of China's move early last week to adjust the fixing mechanism for USD/CNY. Although spot USD/CNY has been stable in the aftermath and has kept the fixes relatively unchanged, this has likely been achieved by significant FX market interventions by the PBoC. 

"Greater market determination of the CNY will imply greater depreciation. Slowing growth prospects, an exchange rate that was 5-10% expensive heading into the fixing move and a largely oneway capital control regime that has kept household portfolios from investing abroad imply further USD/CNY upside", says Barclays. 

Indeed, the spread between onshore and offshore spot rates has widened, against the PBoC's goal of achieving consistency across the two markets. The increase/reversal in forward implied yields in the offshore market suggests that USD demand driven by hedging needs or capital outflows has continued.

"Substantial weakness (towards 6.80 by year-end 2015 and 6.90 by mid-2016) in the currency will likely come alongside significant FX market intervention, and long exposure is recommended via a 4m call spread to take advantage of the gradual move higher", added Barclays.