MUFG said China’s January CPI slowdown was distorted by Chinese New Year base effects, with food and services weighing on headline inflation. It said the underlying reflation trend remains gradual.
The note said PPI deflation narrowed due to firmer global metals prices and tech-related demand. It added that anti-involution measures are not expected to change the gradual pace of reflation.
China Inflation Trend Remains Gradual
It said the PBOC has signalled an easing bias for 2026 and described policy as “moderately loose”. China’s GDP slowed to 4.5% year on year in Q4.
It said further policy easing may be needed in H1 2026 to support the economy and lift credit demand. It also said markets will focus on the PBOC meeting on 20 February for possible easing steps aimed at structural slowdowns.
The note said this policy stance could keep USD/CNY on a mild downward path in 2026. It also said the yuan may stay near the lower end of its trading range.
We see the recent January inflation data, which came in at a subdued 0.1% year-over-year, as being heavily skewed by holiday base effects. This confirms our view that any economic reflation in China will be a slow and gradual process. The underlying demand remains weak despite government efforts to stimulate the economy.
Positioning Ahead Of PBOC Meeting
This slow growth, evident in the 4.5% GDP figure from the final quarter of 2025, underpins the People’s Bank of China’s clear easing bias for this year. This contrasts sharply with the situation in the United States, where recent inflation data has been stickier than expected, pushing back expectations of Federal Reserve rate cuts. This policy divergence is a key factor supporting a stronger dollar against the yuan.
With the PBOC meeting scheduled for February 20th, we believe traders should position for further monetary easing, as a cut to the key policy rate is now firmly on the table. Buying short-dated US dollar call options against the yuan offers a way to profit from a potential upward move in USD/CNY while defining risk. This strategy allows traders to capitalize on the expected mild depreciation of the Chinese currency.
For those looking at the forward markets, locking in a higher exchange rate seems prudent. The consistent messaging about a “moderately loose” policy, which we saw reinforced after the reserve requirement ratio cut in late 2025, suggests a managed depreciation is the most likely path. We see USD/CNY testing the 7.35 level in the coming quarter, up from its current level of around 7.28.
