CNY At A Glance: What Next As The Yuan Moves Below The Critical 7.00 Threshold?

(MENAFN- ING)

6.85-7.25

USDCNY fluctuation band forecast for 2026 Adjusted a little lower amid recent appreciation momentum

USDCNY's year in review: stability amid shifting sentiment

One of the small year-end pleasures is receiving those 'year in review' summaries from various apps and memberships, showcasing key stats, highlights (and occasionally some amusing lowlights), along with trends from the past year.

We may not have a festive graphic or soundtrack to go with this piece, but here's our USDCNY year-in-review for 2025.

• Our 2025 forecast USDCNY fluctuation band of 7.00-7.40 held up well for most of the year. Our USDCNY call was easily our most challenged view in 2025, but we were denied a self-congratulatory pat on the back as the USDCNY spot rate broke below 7.00 on the penultimate trading day of 2025. Ultimately, USDCNY fluctuated within a range of 6.99-7.35, while USDCNH fell into a 6.98-7.42 band.
• Sentiment on USDCNY completed a full 180-degree turn in 2025. The start of 2025 was all about the depreciation story, where markets speculated on how far CNY would depreciate amid the trade war. The story gradually shifted, and by year-end the discourse turned to how much the CNY would appreciate to boost imports and support consumption.
• The CNY-CNH spread narrowed over the past year. There are a variety of potential factors for this, including less speculation pressure on the CNY from international investors, and better management of CNH conditions via liquidity and interventions.

PBoC's currency stability objective: same tune, different direction

The People's Bank of China (PBoC) has been prioritising currency stability over the past few years. For much of this time, the onus has been on preventing rapid depreciation.

However, we have consistently argued that the priority does not only apply to managing depreciation, but also managing the pace of appreciation. As we can see, since the start of December, the PBoC's countercyclical factor has turned negative, indicating that the daily fixings are now counteracting the pace of appreciation.

The key thing to watch moving forward is how much the PBoC pushes back against appreciation. For now, the answer looks like not much, especially compared to the strong resistance to depreciation that we've seen in previous years. This modest pushback on appreciation suggests that further appreciation from this point is still acceptable for the PBoC.

Counter-cyclical factor has turned negative Narrower US-China yield spreads have supported CNY appreciation

US-China yield spreads narrowed in 2025, with the 2-year spread falling from 3.14pp at the start of the year to 2.10pp by year-end, and the 10-year spread falling from 2.89pp to 2.31pp at year-end.

As per usual, shifts in this spread will hinge on any changes in monetary policy expectations. For now, our house forecasts for 2026 have 50bp of rate cuts from the US Federal Reserve, with 20bp of cuts from the PBoC, both broadly in line with market expectations at the start of the year. How these develop in the coming months will likely impact how yield spreads move this year.

We expect yield spreads could still have some room for further narrowing this year, but likely at a slower pace compared to 2025.

Yield spreads narrow as the Fed continues to outpace the PBoC in easing CNY has recovered versus other currencies in recent months

For much of the last year, the CNY's stability versus the USD has basically resulted in its performance versus other currencies generally tracking the movement of the USD. The stability of CNY versus other currencies generally took a backseat when compared to stability versus the USD.

This is particularly observable in the EURCNY pair, which has closely tracked the EURUSD trajectory in the past few years. The EURCNY pair moved in a range of 7.40-8.45 last year, seeing a notably larger fluctuation on the year compared to the USDCNY pair. It is possible that the depreciation versus the EUR also helped support the rebound of exports to the EU.

In recent months, a broadly stable USD backdrop combined with the appreciation of the CNY has led to a recovery of the CNY versus its trade-weighted baskets as well. The CFETS RMB Index and BIS China REER Index have both recovered around 2.6-2.7% from their respective troughs in mid-2025.

CNY has generally strengthened versus other currencies in the past few months NDF points trending higher as CNY strengthens

The NDF points versus the spot have tended to be negative since mid-2022, as investors have largely used NDFs to hedge against the possibility of CNY appreciation.

As the CNY has strengthened in recent months, the NDF points appear to be moving gradually higher.

Toward the end of December, we saw the 1-month NDF points turn positive, implying a shift toward hedging against CNY weakness. Other than a few very short-lived windows during Chinese holiday periods in 2023 and 2024, this is the first time we've seen this since 2022.

1-month NDF points turned positive in late December Current account developments suggest that there's further room for CNY appreciation

China's trade surplus continued to balloon in 2025 despite the outbreak of the trade war. We saw that China's trade surplus eclipsed USD 1tr by November, and it's likely to end the year up over 20% YoY from 2024.

This has led to the current account to GDP ratio continuing to rise throughout the year. Historically, this tends to have a positive correlation with CNY strength, as exports tend to convert proceeds back to CNY to use for domestic expenditures. This trend began to derail a little in recent years, as more exporters began holding foreign exchange abroad to benefit from the interest rate spreads.

There is a risk that if appreciation momentum gains and the interest rate spreads narrow further, we could see periods of strong buying pressure as exporters rush to convert funds back to CNY. This represents one of the biggest risks to the downside for USDCNY.

Exporters holding large quantities of foreign currency abroad adds to appreciation risk Outlook: The PBoC's stance remains key, but currency stability objective likely to stay for now

We enter 2026 facing a very different backdrop than at the start of last year. This time, rather than facing questions about how much the CNY would depreciate to help support exporters, the narrative has shifted to how much the CNY will appreciate to help support consumption and boost imports.

The big question will be whether the PBoC's currency stability objective will remain one of its key goals for this year, especially if we do see a necessity for more aggressive monetary easing amid the ongoing domestic activity slowdown.

So far, we've seen little evidence that this is about to change. Amid various headwinds and shocks from abroad, the currency stability priority has helped remove a source of uncertainty for markets and helped further the long-term goal of RMB internationalisation by encouraging the use of the RMB for trade settlement.

With that said, in December 2025 we saw the largest monthly appreciation for the CNY against the USD since August 2024, and given the pushback on appreciation has been relatively limited for now, this moves up the timeline for CNY appreciation. As such, we have adjusted our USDCNY fluctuation band downward to 6.85-7.25.

Our USDCNY fluctuation band forecast for 2026

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