Societe Generale said stronger China PMI readings point to slow but steady expansion, easing the pressure on the PBoC to loosen policy. Official manufacturing PMI rose to 50.3 in June from 50.0, while non-manufacturing PMI edged up to 50.2 from 50.1. In FX, USD\/CNY fell back below its 50-day moving average at 6.7938 after a US NFP miss, and a private RatingDog manufacturing PMI showed expansion for a seventh consecutive month.<\/p>\n
The yuan\u2019s strength in 1H26 was linked to resilient exports supported in part by the global AI boom. On trade, EU trade chief Maros Sefcovic and commerce minister Wang Wentao held talks in Brussels, as the trade-weighted CEFTS RMB Index climbed to its highest level since July 2022. Attention is turning to the Politburo meeting later this month, while the NDRC tightened fundraising oversight by urging banks to avoid underwriting high-yield yuan and USD bonds. The 10-year CGB yield rose 3bp this week to 1.75%.<\/p>\n
We see the yuan\u2019s strength as a primary trend to follow for the next few weeks. The dollar has weakened broadly after the last U.S. jobs report showed unemployment ticking up to 4.1%, giving the yuan more room to appreciate. We are looking at options that profit if USD\/CNH tests its year-to-date low around 6.75.<\/p>\n
The central bank\u2019s patient stance means we don’t expect dramatic policy shocks before the late July Politburo meeting. Consequently, implied volatility on USD\/CNH options has fallen to near 3.5%, a multi-year low for this time of year. This makes buying put options on the dollar against the yuan relatively cheap for directional bets.<\/p>\n
With the 10-year government bond yield firming up to 1.75%, we are cautious about renewed easing from the central bank. The market has priced out at least one full 10-basis-point rate cut that was expected just a month ago. We would consider shorting Chinese government bond futures to hedge against or speculate on a further drift higher in yields.<\/p>\n
The divergence between the AI-powered export sector and the domestic economy is becoming a key theme. Since May, the STAR 50 Index, which is heavy on tech and semiconductors, has outperformed the broader CSI 300 Index by nearly 8%. We believe using options to structure a pair trade\u2014long calls on a tech-focused ETF and short-biased positions on a financials or real estate ETF\u2014could capture this trend.<\/p>\n\n\n\n