Societe Generale said President Xi’s visit to the US had a limited market impact, as the trade truce was merely extended to January and talks did not produce fresh tariff cuts or an AI dialogue mechanism. In FX, USD/CNY rebounded after briefly moving below 6.70, supported by higher US Treasury yields and a modest easing in the PBoC’s management of the renminbi.
The PBoC restated a moderately loose monetary stance and reiterated its intention to keep the yuan broadly stable while retaining flexibility over its policy toolkit. Chinese banks held the 1-year and 5-year loan prime rates at 3.0% and 3.50%, respectively. Liquidity provision was increased: the central bank lifted the daily reverse repo cap to CNY1tn and, in a separate step, injected a net CNY200bn via MLF operations.
Currency Volatility and Derivatives Opportunities
With the US-China trade truce merely extended until January and no progress on tariffs, we expect USD/CNY volatility to increase in the coming weeks. Derivative traders should consider purchasing short-term USD/CNY call options to profit from the currency’s rebound after its brief dip below 6.70. This upward momentum is highly supported by US 10-year Treasury yields remaining strong near 3.8%, which continues to draw capital away from the yuan.
Rate Stability and Strategic Positioning
We believe trading interest rate swaps is highly favorable now that the People’s Bank of China has kept its loan prime rates unchanged at 3.0% and 3.5%. The central bank’s massive liquidity injections, including a net 200 billion yuan through medium-term lending facilities, signal that monetary policy will remain loose. This steady cash injection means traders should position for a capped yuan upside and steady domestic borrowing costs.
Historically, prolonged trade uncertainty leads to sudden market swings, similar to the spikes in yuan implied volatility seen in previous negotiation cycles. To prepare for the January deadline, we suggest using long straddle options strategies on the offshore yuan to capture major price swings in either direction. This approach helps protect portfolios against sudden political announcements without requiring traders to guess the final trade outcome.
