MUFG said China’s slower CPI growth in January was heavily affected by Chinese New Year base effects. Food and services were the main drags on headline inflation. MUFG said the underlying reflation trend is still slow and gradual. The note said PPI deflation eased as global metals prices improved and demand linked to the tech sector strengthened. It added that “anti-involution” measures are unlikely to speed up reflation. It said the PBOC has signalled an easing bias for 2026 and described policy as “moderately loose”. China’s GDP growth slowed to 4.5% year on year in Q4. It said more easing may be needed in H1 2026 to support growth and boost credit demand. It also said markets will watch the PBOC meeting on 20 February for possible easing steps aimed at structural slowdowns. The note said this policy stance could keep USD/CNY on a mild downward path in 2026. It also said the yuan may stay near the lower end of its trading range. We see January inflation, which rose only 0.1% year over year, as being largely distorted by holiday base effects. This supports our view that reflation in China will be slow and gradual. Even with government support, underlying demand remains weak. This slow momentum—shown by the 4.5% GDP growth rate in Q4 2025—supports the People’s Bank of China’s clear easing bias this year. This is very different from the United States, where inflation has stayed firmer than expected. That has pushed back hopes for Federal Reserve rate cuts. This policy gap is a key reason the dollar has been stronger against the yuan. With the PBOC meeting on February 20, we think traders should be ready for more easing. A cut to the key policy rate is now a realistic possibility. One way to express this view is to buy short-dated USD call options against the yuan. This can benefit from a rise in USD/CNY while keeping risk defined. It also fits our expectation of a mild yuan depreciation. In the forward market, it may make sense to lock in a higher exchange rate. The steady message of “moderately loose” policy—reinforced after the reserve requirement ratio cut in late 2025—points to a managed depreciation as the most likely outcome. We expect USD/CNY to test 7.35 in the coming quarter, up from about 7.28 now.

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