After earlier gains today, USDCNY continues to trend lower again by trimming price from the peaks of 6.7277 levels, breaching below 6.7101 (21-DMA) would attract more bearish potential. The central bank keeps setting the USDCNY fixing rate aiming new lows again, which has supported the enthusiasm towards CNY.

Several factors argue for a neutral, or even a positive outlook on the RMB over the coming 3-6 months relative to the forwards and on a relative value basis against regional low yielders (e.g. against TWD).

These factors include a weaker dollar trend, the authorities apparently content with a stable (instead of depreciating) CFETS basket, the upcoming leadership changes, better growth data, and earlier tightening in capital controls bearing fruit.

The major near term risk for the RMB remaining strong is a retracement in the EUR/reversal in the weak dollar trend, Starting in Q4 Chinese growth is expected to weaken (SG expects 6.4% YoY GDP growth in Q4 2017 and 6.3% in Q1 2018), which may cause current positive sentiment to be re-rated and to cushion the downturn the authorities may embrace modest depreciation over a longer time horizon.

In the meantime, the Caixin PMI, which tracks the performance of the private sector in China, picked up strongly to 51.1 in July, from 50.4 in the previous month; further triggering USD selling flows from both corporates and trading desks. If we take a look at the trade weighted CNY index (i.e. CFETS index), it has been hovering around the 93 level, with some two-way volatility since April. That said, USDCNY is pretty much dependent on the performance of the USD. The PBoC seems to be comfortable with this strategy for now.

Hence, we’ve already advocated deploying USDCNH calendar straddles on Yuan’s stiffness, we’ve been firmer to hold onto this strategy.

Also, note the recent struggle to reassert the upside bias in USDCNH through the key 6.79/6.71 resistance zone raises the risk that additional range action can develop. Another key focus is on USDSGD, as the recent failure against the 1.39 resistance zone. Hence, we advocate shorts in 6w vs long 3m USDCNH straddle calendars strategy.