The Chinese yuan has recently reached an eight-month high, but it may soon weaken again. Analysts are concerned because of ongoing economic problems and the possibility of a stronger U.S. dollar. While the currency has moved out of a narrow trading range, issues like weak domestic demand and the impact of increased U.S. tariffs remain. Even with a trade agreement, these factors could hurt the yuan’s value.

Predictions On Yuan Value

Standard Chartered’s Becky Liu expects the yuan to lose value by the end of the year. She cites decreased support from GDP growth, exports, and the current account as reasons for this decline. Ryan Lam from Shanghai Commercial Bank shares this view. He notes that optimism about economic reforms is fading and predicts the yuan will drop to 7.20 per dollar due to the ongoing strength of the U.S. economy. Given this outlook, derivative traders should prepare for potential yuan weakness against the dollar. The recent rise seems to be a short-term bounce rather than a new upward trend. Therefore, any short-term strength in the yuan could be a chance to adopt bearish positions. Liu’s worries about economic challenges are reinforced by recent data. For example, China’s official manufacturing PMI for May 2024 unexpectedly fell to 49.5, showing a decline in factory activity and highlighting weak domestic demand. This underlying weakness makes it hard for the yuan to maintain its recent gains.

Supporting Factors For A Higher Exchange Rate

Lam’s forecast is backed by the ongoing strength of the U.S. economy and a hawkish Federal Reserve. Recent data shows persistent U.S. inflation, leading to delayed expectations for Fed rate cuts, which keeps the dollar appealing. This policy difference between a potentially easing China and a strong U.S. is likely to drive the USD/CNY exchange rate higher. To take advantage of this, we recommend buying U.S. dollar call options against the yuan with strike prices near 7.20. This strategy allows participation in potential gains while keeping risks defined and limited. The options market offers a way to act on this view without committing to an immediate spot position. A return to the 7.20 level is realistic based on the currency’s recent history. The USD/CNY pair frequently traded above 7.25 and even reached 7.30 in the second half of 2023. This history indicates that moving back to 7.20 would merely revert to a previously established trading zone. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now