China’s July activity data pointed to softer momentum at the start of Q3, with most major indicators coming in below market expectations. Industrial production rose 4.5% year on year, which marked the first easing in three months, while retail sales also undershot forecasts. Policymakers have responded by urging additional fiscal support, including a push for practical incremental measures, with a focus on faster bond issuance and front-loaded infrastructure spending.
In foreign exchange, USD/CNY and offshore USD/CNH each rose 30 pips to 6.74 and 6.75 respectively. At the same time, Chinese banks’ net client FX sales in July halved to an eight-month low of USD25.2bn, pointing to a slowdown in corporate conversion flows that had previously underpinned the yuan. With that support fading, the currency is more exposed to changes in sentiment around China’s growth trajectory.
Yuan Outlook and Derivative Strategies
We advise derivative traders to position for a weaker Yuan in the coming weeks as China’s economic momentum cools at the start of the third quarter. With July’s industrial production growth slowing to 4.5% and corporate FX conversion support drying up, the offshore Yuan is highly vulnerable to downward pressure. Buying USD/CNH call options offers a clean way to capture potential upside if the currency pair climbs past the 6.75 level.
Historically, when Chinese banks’ net client FX sales drop sharply—similar to the halving we saw in July to an eight-month low of USD 25.2 billion—the currency loses its strongest technical buffer. During previous growth slowdowns, such as the market dips in late 2023 and mid-2024, a lack of corporate FX conversion quickly opened the door for rapid Yuan depreciation. We recommend utilizing short-dated Yuan put options to hedge against a sudden drop in sentiment before Beijing’s next policy move.
Policy Developments, Equities, and Commodities Positioning
As Beijing faces intense pressure to step in, we expect upcoming policy announcements to trigger sharp swings in the equity space. Traders should consider long volatility strategies, like straddles on China-focused ETFs, to profit from these expected market movements. This allows us to capture gains from large price swings regardless of whether the government’s upcoming fiscal packages succeed or fail to lift the market.
The slump in industrial activity also suggests we should adjust our positions in commodity derivatives. With the tech and property sectors struggling to support demand, industrial metals like copper and iron ore are facing immediate price pressure. Shorting near-term copper futures while buying long-term call options could protect portfolios ahead of the expected government infrastructure spending.
