China’s industrial profit growth cooled in May, with year-on-year gains easing to 21.1% from 24.7% in April, while cumulative growth for January–May stood at 18.8% versus 18.2% in January–April. The data point to softer momentum as weak domestic consumption and investment increasingly offset support from strong exports and firmer producer prices. June’s NBS official manufacturing and non-manufacturing PMI readings are due Tuesday; Bloomberg consensus places manufacturing at 50.1 and non-manufacturing at 50.0, close to the break-even mark.
Policy expectations have moderated, as just over half of Bloomberg-surveyed economists now anticipate the PBoC will remain on hold through end-2026, though there remains scope for a 10bp cut in H2. Separately, Vice Premier He Lifeng urged faster progress in core technologies, emphasising technological self-reliance and stronger industrial and supply-chain resilience. In FX markets, USD/CNY rose 30 pips to 6.80 last Friday and 320 pips over the week, while offshore USD/CNH also gained 30 pips to 6.80 on the day and 210 pips across the week.
Yuan Outlook Amidst Slowing Economic Momentum
We see China’s slowing economic momentum creating downward pressure on the yuan against the US dollar. Industrial profit growth is easing, and recent data shows May retail sales grew by only 2.5%, well below forecasts, confirming weak domestic consumption. This trend signals that the CNY’s recent weakness, with USD/CNY now at 6.80, is likely to continue.
The most immediate catalyst is the June manufacturing PMI data due out tomorrow, June 30th. While consensus forecasts a reading just inside expansion territory at 50.1, we anticipate a drop into contraction below 50. A weaker-than-expected number would almost certainly push the yuan lower against the dollar.
Derivative Strategies and Policy Considerations
Given this outlook, we believe derivative traders should consider buying USD/CNY call options. This strategy allows for capitalizing on a potential weakening of the yuan while clearly defining the maximum risk involved. Strike prices above the current 6.80 level offer a way to position for a breakout driven by negative economic data.
We also anticipate a rise in implied volatility for USD/CNH options heading into the PMI release. The current market pricing doesn’t seem to fully reflect the risk of a contractionary print. This presents an opportunity to position before volatility potentially increases following the data announcement.
The possibility of a People’s Bank of China rate cut later this year adds another layer to our view. Although market expectations for a cut have diminished, we still see potential for a 10 basis point reduction in the second half of 2026 to support the economy. Any such move would further weigh on the yuan, making long USD positions more attractive.
This situation is reminiscent of the 2015-2016 period, when slowdown fears prompted significant currency volatility and capital outflows. Historical precedent suggests that when China’s growth indicators falter, the authorities can act decisively, leading to sharp market moves. Therefore, using options to manage risk is a prudent approach in the coming weeks.
