The Chinese Yuan presented an interesting paradox in today’s market action. Onshore Yuan sank below 7.3 mark against US Dollar, registering a 14-month low. This decline has intensified speculation that the People’s Bank of China might be adopting a more lenient stance toward currency depreciation. Such a move could be part of broader efforts to bolster economic growth amid mounting headwinds. The downward bias has been further fueled by the possibility of a renewed “Trade War 2.0” under the incoming US administration.
Conversely, the CFETS RMB Index—a measure of the Yuan’s trade-weighted performance against a basket of currencies—surged to its highest level since October 2022. Although primarily driven by the relative weakness of major currencies versus the Dollar, this uptick hints at potential challenges for China’s export competitiveness to other key markets.
These moves also coincide with CFETS basket weighting adjustments for 2025, including reductions in the weightings of Dollar (from 19.46% to 18.903%), Euro (from 18.08% to 17.902%), and Yen (from 8.963% to 8.584%).
The larger question remains: How far is China willing to let Yuan depreciate? This is a mounting question given the uncertainty surrounding any trade measures the US might impose after Donald Trump’s January 20 inauguration. Beijing’s true intentions would become clearer after that.
Technically, it does look like that USD/CNH (Dollar vs offshore Yuan) is ready to resume it’s long term up trend from 6.3057 (2022 low). Decisive break of 7.3745 (2022 high) will pave the way to 100% projection of 6.6971 to 7.3673 from 6.9709 at 7.6411.
