U.S. Treasury Secretary Scott Bessent has highlighted the challenges that China’s yuan presents to Europe, especially when compared to the U.S. He noted that although the yuan has fallen against the euro, it has remained stable against the dollar. After meeting with Chinese Vice Premier He Lifeng in Madrid, Bessent mentioned that U.S. tariffs have significantly reduced America’s trade deficit with China. This year, trade between the two countries has dropped by 14%, while China’s trade with Europe has risen by nearly 7%.

Yuan Dynamics Against Global Currencies

This year, the yuan has strengthened against the dollar, rising from 7.3 in January to 7.1. However, it has reached new lows over 8.4 against the euro, which boosts Chinese exports to Europe and increases the EU’s trade deficit. Bessent commented on currency manipulation concerns, explaining that China treats the yuan as a “closed currency.” These observations reveal a significant difference in how the yuan is performing, creating opportunities. The yuan’s steady position near 7.1 against the dollar contrasts with its weakness against the euro, which has recently exceeded the 8.4 mark. This two-speed currency situation stems from different trade dynamics and policies between the U.S. and Europe. Traders should be prepared for the continuation of this trend, favoring euro weakness against the yuan. The European Central Bank’s guidance from its September 11th meeting indicated it will keep rates low for a longer time, supporting further euro depreciation while Chinese exports to Europe remain strong. Using options to anticipate the EUR/CNY exchange rate moving towards 8.5 in the coming weeks could be a smart strategy.

Strategic Currency Positions

At the same time, the stability of the U.S. dollar against the yuan suggests caution. U.S. tariffs have effectively changed trade patterns, with August’s data showing the U.S.-China deficit at its lowest since 2022. This stability makes shorting the yuan against the dollar a less attractive option right now. Describing the yuan as a “closed currency” should also alert traders to potential volatility. Beijing’s sudden policy changes pose risks; thus, taking long volatility positions on the EUR/CNY pair—like buying a straddle—might be beneficial. This strategy allows a trader to profit from significant price movements in either direction, protecting against unexpected policy news. Past trends have shown similar diverging behaviors, such as during 2014-2016 when varying central bank policies created lasting currency trends. The current scenario, with Eurostat’s report showing the EU’s trade deficit with China growing another 5% last quarter, suggests this isn’t just a temporary shift. A strategy to go long on EUR/CNY while remaining neutral on USD/CNY seems the most sensible approach. Create your live VT Markets account and start trading now.

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