We now expect less CNY weakness in 1H 2017 but keep the year-end target at 7.10as renminbi depreciation against USD remains modest this year, even as the market has turned more bullish USD recently. If the PBoC continues to maintain a stable TWI, the near-term move of USDCNY (CNH) will just follow the broad USD dynamics.

Given our global FX team expects only modest USD strength ahead, it seems that the upside risk for USDCNY (CNH) is relatively small in the near term without significant broad USD strength like Q4 last year. The tail risk of a sharp CNY depreciation for the US imposing a high tariff on China still looks small.

China is targeting around 6.5% growth this year from the 6.5-7% target in 2016 where it eventually hit 6.7%. This pace will enable China to achieve President Xi’s goal to double GDP per capita by 2020 from 2010.

He reiterated China’s commitment to free-trade highlighting that it will be a lose-lose situation for all in a trade-war. For USDCNY, the mid-point fix today was stable 6.91150. Spot USDCNY is also steady at around the 6.9160 level and awaiting clearer signals from the Fed and the USD. Year-to-date, CNY is up 0.4% vs USD and has in fact underperformed the rest of Asian currencies which are up on average by nearly 2%.

On the contrary, any abrupt CNY appreciation is only deemed as the effects of the selling FX reserves to prevent severe CNY weakness.

CNH Option strategies on hedging grounds:

Buy USDCNH 1y topside seagull, strikes 6.90/7.20/7.50, zero cost (indicative, spot ref: 6.89), the structure is a standard 1y call spread strikes 7.20/7.50 fully financed by selling a put strike 6.90, exposed to a maximum USDCNH appreciation of 4.2% at expiry.

Buy USDCNH 1y call spread strikes 6.90/7.80, (spot ref: 6.8900) This longer-term trade positions for further CNH depreciation, generating a maximum leverage close to 6 times beyond 8.00 in one years.