China’s choice to let the yuan strengthen is affecting how investors view emerging markets. When the yuan shifts by 1%, currencies like the Thai baht, Malaysian ringgit, Chilean peso, Mexican peso, and Brazilian real usually move in the same direction. Currently, the connection between the dollar-yuan exchange rate and the MSCI EM Currency Index is at its highest since May 2024. The People’s Bank of China has set the yuan at its strongest reference rate since November. This has resulted in over a 2% increase against the dollar this year, reversing earlier losses. Hedge funds are betting on the yuan rising even more, predicting it could reach around 7 per dollar by the year’s end, showing growing confidence in its strength.

Benefits of a Stronger Yuan

A stronger yuan helps Asian currencies and emerging market debt, furthering China’s long-term goal to internationalize its currency. It also allows local central banks to lower interest rates without weakening their own currencies, promoting a shift away from the dollar across Asia. With the yuan appreciating, opportunities are opening up in emerging market currencies. Because of the close link, a stronger yuan is likely to boost currencies like the Thai baht and Mexican peso. The People’s Bank of China’s recent reference rate, set below 7.10 for the first time in ten months, strengthens this trend. We anticipate the yuan will reach 7.00 against the dollar by the end of the year. We’re using put options on the USD/CNY pair, with expiration dates in December 2025 and January 2026. The implied volatility on these options is at multi-month lows, making long-term calls on the yuan relatively cost-effective. This indicates that the market expects a steady increase, rather than a sudden spike. We are also expanding our strategy by going long on a group of correlated emerging market currencies against the dollar. Recent data shows that Asian-focused currency funds attracted over 60% of new emerging market inflows in August 2025, supporting this approach. This trend is similar to the one seen in 2020-2021, when a stronger yuan led to a big rally in emerging market assets.

Leeway for Regional Central Banks

The strength of these currencies allows regional central banks to cut interest rates more freely. For example, since the Malaysian ringgit gained nearly 3% this past quarter, we are monitoring for a possible rate cut from its central bank. This opens up possibilities for trading interest rate derivatives, anticipating a easing that once seemed unlikely. Create your live VT Markets account and start trading now.

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