Jason Daw, Research Analyst at Societe Generale, suggests that despite having a bearish outlook on the RMB, long CNH-TWD in 3m NDF offers attractive carry and in reasonable scenarios of yuan depreciation should perform well (Strategies for a CNY7.50 world). Key Quotes “Our base case scenario (USD-CNY 6.80 at end-2016) is that the Chinese authorities opt for strengthening capital controls on local residents, improving enforcement of existing regulations, and utilizing reserves in a measured fashion, instead of allowing too much flexibility/depreciation. Yesterday’s fixing and associated price action supports our central scenario. CNH-TWD should be upwardly biased and positive carry provides a decent offset if TWD modestly lags CNY weakness. Our risk scenario (USD-CNY 7.50 by end 2016) would occur from persistent capital outflows as the PBoC fails to tighten capital account restrictions fast or effectively enough, resulting in overly rapid reserve depletion. The path to a much weaker RMB could be abrupt (one-off devaluation, 60% chance). Long CNH-TWD should do well in all the above scenarios except a one-off devaluation where mark-to-market losses could be painful in the short run until regional currencies play catch up. Our USD-CNH call spread expires at month end and with elevated volatility rolling the position does not offer favourable risk-reward at the moment Expression: Long CNH-TWD 3m forwards Long CNH-TWD 3m forward at 5.03 with a target of 5.30 (+5.4%) and a stop at 4.92 (- 2.2%). Positive carry is 34bp/month. Modest capital allocation is recommended to minimize negative PnL implications from the tail risk event within our risk scenario. Risks: One-off deval or significant EM rally The trade would suffer on a mark-to-market basis if there was a large one-off devaluation. If the USD weakens on a sustained basis, USD-TWD would likely fall faster than USD-CNH.” For more information, read our latest forex news.