U.S. Treasury Secretary Scott Bessent has remarked on the challenges posed by China’s yuan to Europe, compared to the United States. He pointed out that while the yuan has depreciated against the euro, it has maintained stability when compared to the dollar.
Following discussions in Madrid with Chinese Vice Premier He Lifeng, Bessent noted the impact of U.S. tariffs, which have reduced America’s trade deficit with China. Bilateral trade between the nations has decreased by 14% this year, whilst China’s trade with Europe has increased by nearly 7%.
Yuan Dynamics Against Global Currencies
The yuan has strengthened against the dollar this year, improving from 7.3 in January to 7.1. However, it has plummeted to new lows above 8.4 against the euro, boosting Chinese exports to Europe and increasing the EU’s trade deficit. Commenting on concerns about currency manipulation, Bessent explained that Beijing treats the yuan as a “closed currency”.
Based on these comments, we see a clear divergence in the yuan’s performance that presents opportunities. The yuan’s relative strength against the dollar, holding near 7.1, contrasts sharply with its historic weakness against the euro, which recently pushed past the 8.4 level. This two-speed currency environment is a direct result of differing trade dynamics and policy impacts between the economic blocs.
Traders should consider positioning for a continuation of this trend, favouring euro weakness against the yuan. The European Central Bank’s forward guidance from its September 11th meeting hinted at holding rates lower for longer, which supports further euro depreciation, especially as Chinese exports to the region remain strong. Using options to bet on the EUR/CNY cross rate climbing further towards 8.5 in the coming weeks could be a viable strategy.
Strategic Currency Positions
Simultaneously, the relative stability of the U.S. dollar against the yuan suggests caution in betting on a major move there. U.S. tariffs have successfully altered trade flows, as August’s trade data confirmed the U.S.-China deficit fell to its lowest point since we saw in 2022. This managed stability makes shorting the yuan against the dollar a less compelling trade for now.
The characterization of the yuan as a “closed currency” should also put traders on alert for increased volatility. Sudden policy shifts from Beijing are always a risk, meaning long volatility positions on the EUR/CNY pair, such as buying a straddle, could pay off. This would allow a trader to profit from a large price swing in either direction, hedging against unexpected policy announcements.
We’ve observed similar divergences in the past, such as during the 2014-2016 period, where differing central bank policies created lasting trends in currency pairs. The current setup, with Eurostat’s preliminary data showing the EU’s trade deficit with China widening another 5% last quarter, suggests this is not a short-term anomaly. A relative value trade, going long EUR/CNY while staying neutral on USD/CNY, appears to be the most logical approach.
