China’s central bank has relaxed the cap on US dollar deposit rates, yet the renminbi has risen by about 3% against the dollar this year. The policy tweak is framed as having limited traction because the 1-year time-deposit rate differential is around 2.2%, while the gap on 1-year government bonds stands at 2.7%, and both sit below the currency’s recent pace of appreciation. On a 3-month change annualised basis, the renminbi’s appreciation has only fallen below the interest-rate differential as far back as May last year.
At the same time, foreign-currency deposits at Chinese banks have continued to climb. Corporate foreign-currency deposits have been expanding at a double-digit rate year-on-year since February last year, and most recently reached $602.4bn, the highest level since the data series began in January 2015. Despite that build-up, there is described to be little sign of depreciation pressure, and the recent appreciation trend is presented as continuing over the coming months.
Yuan Strength Makes It Sensible to Hold Despite Lower Rates
We see the Chinese Yuan continuing to gain on the US Dollar in the coming months, making it more sensible to hold Yuan despite lower interest rates. The recent move by the People’s Bank of China to adjust the cap on US Dollar deposit rates is unlikely to change this underlying trend. This is because the Yuan’s appreciation has been outpacing the interest you would earn by holding dollars.
Given this, we should consider positioning for a lower USD/CNY exchange rate over the next several weeks. Derivative strategies such as buying put options on the USD relative to the CNY or selling USD/CNY forward contracts could be effective. These positions are designed to profit from the dollar’s expected slide against the yuan.
Trade Surplus and Policy Divergence Support Further Yuan Appreciation
Recent data reinforces this view, as China’s May 2026 trade surplus came in at a robust $81 billion, announced just last week. This indicates strong export demand, which typically supports the nation’s currency. As of today, the USD/CNY is trading near 6.34, continuing its steady decline from earlier in the year.
The policy divergence between the US and China also supports our position. The Federal Reserve’s latest communications hint at a pause in rate hikes amid cooling inflation, which puts a cap on the dollar’s appeal. In contrast, Chinese officials are signaling continued stability and targeted economic support.
This pattern is reminiscent of the 2017-2018 period when a strong Chinese trade performance led to a significant appreciation of the yuan. Therefore, we are looking at options with expiry dates in late July and August 2026 to capitalize on this ongoing momentum. Implied volatility in the options market remains moderate, suggesting that now may be an opportune time to enter these trades before the market fully prices in a further decline.
