Chinese Yuan (CNY) rates steepened over the past week, linked to a ceasefire between the United States and Iran and a stronger macro start to the year. China’s economy grew 5% year on year in Q1, supported by external demand and a rebound in industrial activity.
Purchasing Managers’ Index (PMI) is expected at 50.3 in April, alongside firmer high-frequency indicators. Cement clinker and electric furnace utilisation rose by 2.4ppt and 1.0ppt, and operating rates increased at major steel mills.
Energy Shock Concentrated In Select Sectors
The oil shock effects are mainly within energy-related industries so far. Operating rates at petroleum asphalt plants fell, while PTA load rates dropped from 89.4% in March to 75.7% in April month to date.
Onshore bond demand stayed strong. Northbound Bond Connect turnover hit a record CNY1.22tn in March, with average daily volumes at a high of CNY55.6bn.
Offshore flows also continued. EPFR data showed China bond funds took in USD1.6bn in the first week of April.
Overall growth momentum is described as stable but uneven, supporting a measured policy approach. The People’s Bank of China is expected to keep an accommodative bias through liquidity operations, without large rate cuts.
Policy Stance And Market Positioning
Looking back, we saw the CNY curve steepen around this time in 2025 on the back of a solid 5% Q1 growth figure. This was driven by resilient industrial activity and what was then perceived as a de-escalation in geopolitical tensions. That period provided a clear signal of underlying economic strength.
Today, the picture is more nuanced as China’s Q1 2026 growth came in slightly softer at 4.8%, just below the official target. However, the newly released official manufacturing PMI for April is holding at an expansionary 50.4, suggesting the industrial core remains stable. This points to continued resilience, even if the overall economic pace has moderated from the highs of last year.
The People’s Bank of China is reinforcing expectations of a measured policy stance, just as we saw in 2025. They have held key lending rates steady this month while ensuring ample liquidity in the system through market operations. This action should keep the front end of the interest rate curve anchored and prevent any sharp funding squeezes.
While onshore bond demand remains solid, we are not seeing the record-breaking offshore inflows experienced in March 2025. Data from the first quarter of 2026 shows foreign inflows have been more moderate, with overseas investors holding CNY 3.9 trillion of onshore bonds at the end of March. This suggests global investors are becoming more selective, which could limit downward pressure on long-term yields.
Given the central bank’s clear preference for stability, implied volatility on the yuan is likely to remain compressed near its current low of 3.8% for 3-month options. Selling short-dated USD/CNY straddles or strangles to collect premium could be an attractive strategy in this environment. The tightly managed nature of the currency limits the risk of unexpected large moves.
The combination of a steady PBoC and moderating long-term growth supports a gentle curve steepening. Traders could consider entering payer positions in long-tenor CNY interest rate swaps while receiving in shorter tenors. This position benefits if long-term rates rise relative to short-term rates, reflecting the uneven economic picture.
