China’s central bank has issued a document defending its FX policy as EU trade talks with Beijing continue, rejecting the argument that the CNY level is driving China’s large trade surplus and instead attributing export gains to manufacturing competitiveness. The paper implies limited willingness to adjust policy in response to external pressure, while the valuation debate continues to focus on how much currency pricing contributes to trade performance.
On the metrics, BIS REER data show the RMB rose nearly 60% from 2005 to end-2015, then fell 20% from the 2022 peak to last year’s low, before rebounding 6.5% to today’s level. IMF estimates put undervaluation at 12–20%, implying the currency is cheap, though not the sole explanation for export strength. Recent official USD/CNY fixings point to a preference for a firmer CNY even as the dollar strengthens, while EUR/CNY is 10% lower than its January high, with scope for further declines in the near term.
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Central Bank Policy and Yuan Outlook
We believe derivative traders should prepare for a stronger Chinese Yuan in the coming weeks as the central bank actively resists depreciation. Recent currency fixings show a clear determination to steer the Yuan higher despite ongoing global trade disputes. This policy stance suggests that short-term bearish bets on the Yuan carry significant regulatory risk.
Historically, the Yuan’s Real Effective Exchange Rate dropped nearly 20% from its 2022 peak before recovering slightly. With the IMF estimating a current undervaluation of 12% to 20%, and China’s trade surplus hitting massive levels—such as the $99 billion monthly highs seen in recent trade reports—the fundamental pressure for appreciation is clear. We expect the central bank to use this valuation gap to justify a stronger exchange rate during international trade negotiations.
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Trading Recommendations and Strategy
We recommend that traders target the EUR/CNY cross-pair, which has already fallen more than 10% from its January highs. Utilizing put options on EUR/CNY can help capture further downside while keeping risk defined. This strategy takes advantage of the economic divergence between a stabilizing Chinese manufacturing sector and slowing growth in the Eurozone.
For the USD/CNH pair, we should consider trading range-bound strategies like short-dated put spreads. The tight control over daily currency fixings is highly likely to suppress unexpected upward spikes in the dollar-yuan exchange rate. We advise keeping a close eye on upcoming industrial production data from Beijing to confirm the strength of this currency trend.
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