China’s Consumer Price Index (CPI) rose by 0.7% in November compared to the previous year, matching expectations. This increase, the largest since February 2024, was mainly due to higher food prices. Core inflation remained steady at 1.2%. The Producer Price Index (PPI) was recorded at -2.2% year-on-year, indicating ongoing deflation. This suggests that domestic consumption is still weak. Weak domestic demand is also influencing the USD/CNH currency pair’s downward trend. If China’s currency appreciates, it may encourage consumer spending, as lower import prices would increase disposable income. Current economic indicators highlight the challenges China faces in boosting domestic consumption. A stronger currency could help shift China’s growth model towards more consumer spending. Recent inflation data shows that domestic demand remains weak, supporting the case for a stronger yuan. Retail sales in October 2025 grew only 2.5%, falling short of expectations, which indicates that consumers are reluctant to spend. This situation supports the continued decline of the USD/CNH pair in the coming weeks. We anticipate that the yuan will continue to strengthen, boosting consumer purchasing power by lowering the cost of imported goods. This expectation is reinforced by the People’s Bank of China’s decision to set a daily yuan reference rate consistently stronger than market predictions over the past month, indicating a preference for a stronger currency. Conversely, the US Dollar faces pressure as the Federal Reserve is likely to cut interest rates later today. Recent US data revealed that non-farm payrolls added only 95,000 jobs in November 2025, giving the Fed a clear reason to ease its policy. The core PCE, which the Fed uses as its key inflation measure, has dropped to 2.8%, offering officials leeway for a rate cut. With these factors affecting the USD/CNH pair, we should explore derivative strategies to profit from its continued decline. This could include buying put options on the pair to bet on lower prices or selling out-of-the-money call spreads to earn premiums. These strategies align with the weaker US dollar theme and the specific conditions in China. From our perspective in late 2025, this scenario resembles the period after the dollar peaked in 2022 when global growth concerns were prominent. We can also consider proxy trades, like buying call options on the Australian dollar, which typically appreciates with the yuan, providing another avenue to express this market view. The nature of today’s Fed meeting could lead to increased volatility, even though the direction seems clear. We might look into buying short-dated straddles on the EUR/USD or VIX call options to hedge against any sharp, unexpected market reactions to the Fed’s comments or updated economic forecasts.

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