The dollar surged to a for multi-year peaks against Chinese currency on today, bolstered by more than anticipated U.S. economic data that showed the economy on track for steady growth and reinforced expectations of interest rate increases by the Federal Reserve next month and in 2017.

CNY-CNH spread widens significantly in the past few trading days, hinting that the market adds more bets on CNY depreciation for the time being. The widening of the CNYCNH spread has also triggered the market speculations that China’s central bank might take action as they did at the beginning of the year.

However, we don’t think it makes sense for China’s central bank to conduct massive intervention at this conjunction. While USDCNY and USDCNH continues to touch multi-year highs, the CNY index remains stable, meaning that CNY deprecation is a result of a broad-based USD strength.

That said, the market intervention won’t change the market direction, but could provide better time window for market to add CNY shorts.

In our opinion, China’s central bank is likely to set the USDCNY fixing rates at the lower end of the market expectations, to smooth out the market volatility somewhat. For instance, the PBoC set USDCNY fixing rate at 6.9085 this morning, compared with market expectations at 6.9158.

CNH is rapidly approaching the 7-handle which is a psychological level but nothing of notable significance in relation to the path of the currency over the medium term.

If the PBoC chooses to stall the move around this level, it will only be temporary.

We target USDCNH at 7.20 by end-2017, but the risks are clearly toward more weakness, especially as the PBoC has not shown any desire to slow down the rate of depreciation ahead of Trump’s inauguration.

As long as the dollar is bid, CNY needs to weaken in order to keep the CFETS basket from appreciating.

In vol space, seagull structures are still the way to go in our opinion. Dollar calls, call spreads, or one touches are all quite expensive but still worth staying hedged.