China’s decision to allow the yuan to strengthen is influencing emerging markets’ sentiment. When the yuan moves by 1%, the Thai baht, Malaysian ringgit, Chilean peso, Mexican peso, and Brazilian real often follow suit. The link between the dollar-yuan reference rate and the MSCI EM Currency Index is the highest since May 2024.
The People’s Bank of China has set the yuan to its strongest reference rate since November. This has led to a more than 2% gain against the dollar this year, reversing previous declines. Hedge funds are now betting on a further rise, aiming for around 7 per dollar by the end of the year, indicating increased confidence in the yuan’s appreciation.
A Stronger Yuan’s Benefits
A stronger yuan benefits Asian currencies and emerging market debt, aiding China’s long-term aim to internationalise its currency. It also allows regional central banks to ease policies without their currencies weakening, supporting the trend of moving away from the dollar across Asia.
Given the yuan’s managed appreciation, we are seeing a clear opportunity in emerging market currencies. The tight correlation means a stronger yuan will likely lift currencies like the Thai baht and Mexican peso. The People’s Bank of China’s recent fixing of the reference rate below 7.10 for the first time in ten months reinforces this trend.
We are positioning for the yuan to reach 7.00 against the dollar by year-end, using put options on the USD/CNY pair with December 2025 and January 2026 expiries. Implied volatility on these options has fallen to multi-month lows, making long-dated calls on the yuan relatively cheap. This suggests the market is pricing in a steady grind stronger, not a sudden shock.
We are also extending this view by going long a basket of correlated EM currencies against the dollar. Data showing Asian-focused currency funds received over 60% of new EM inflows in August 2025 supports this trade. This pattern is reminiscent of the 2020-2021 period, where a strong yuan preceded a significant rally in emerging market assets.
Leeway For Regional Central Banks
The strength in these currencies gives regional central banks more leeway to cut interest rates. For instance, with the Malaysian ringgit up nearly 3% this past quarter, we are now watching for a potential rate cut from its central bank. This creates opportunities to trade interest rate derivatives, anticipating easing that previously seemed unlikely.
