We reckon that the USDCNY exchange rate determination will indeed mirror an increasing reference to the NEER currency basket even if the PBoC has not explicitly committed to this.

The central bank set the yuan's official midpoint rate at its lowest level since March 2011, amid persistent worries over an economic slowdown and capital outflows.

After 14 December 2014, we had already stated that the recent announcement of the launch of the CFETS CNY index is a clear indication that China still has the more room for USDCNY's higher levels in an environment of USD strength, we continue to have the same opinion as the authorities shift their focus towards a basket measure of currencies.

The PBoC needs to guide public opinion to focus more on the CNY effective exchange rate against a basket of currencies rather than the bilateral USDCNY rate to assess the likely direction of the currency.

The Chinese central bank has reiterated that "it will maintain the CNY exchange rate basically stable at an appropriate and equilibrium level against a currency basket" on 14 December.

However, recent USDCNY movements appear to suggest some (trend) depreciation in the CNY NEER, in view of the previous strong NEER appreciation since mid-2014 (+15%), continued weakening growth, and persistent deflation risks.

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.

Weaker CNY Ahead - Hedging Receivables

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

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

This style of derivative instruments is quite suitable for small-scale international traders as forward contracts does not cost of hedging upfront but provides hedger with a predetermined rate of exchange for certainty.

One can even forgo if prevailing spot FX markets are conducive than forwards rates.