Yuan Appreciation Accelerates on Strong Fixing, but the Road Back to 6 Isn’t Smooth

TradingKey - Since late August, the Chinese yuan has entered a phase of rapid appreciation. Supported by a stronger CNY daily reference rate guidance, domestic policy stimulus, and a weakening U.S. dollar, the offshore yuan (CNH) hit a 2025 year-to-date high last week. Hedge funds and major financial institutions are increasingly betting on the yuan breaking above 7, though some caution that this upward momentum, while present, may be limited in scope.

As of Monday, September 1, the USD/CNH exchange rate stood at 7.1300, having dipped as low as 7.1171 on Friday — the strongest level since the end of 2024.

USD/CNY Exchange Rate, Source: TradingKey

According to the Singapore Exchange (SGX) on August 28, the most actively traded USD/CNY option was a put option with a strike price of 6.94, expiring in December. Standard Chartered noted a resurgence in demand for USD/CNH downside exposure, primarily driven by hedge fund clients.

Investors are increasing year-end bullish bets on the yuan reaching 7 or higher, citing growing confidence in Chinese stimulus policies and shifting U.S. interest rate expectations.

HSBC reported that investor sentiment toward Chinese assets is improving, supported by pro-growth fiscal policies and positive developments in U.S.-China trade talks.

Huatai Securities said the recent acceleration in the yuan’s appreciation against the dollar and a broad basket of currencies was driven by:

• A higher CNY midpoint setting
• Market forces
• Rising global appetite for Chinese equity assets

The firm noted that the yuan remains significantly undervalued relative to its equilibrium level, and Chinese assets are under-allocated globally. Against the backdrop of global de-dollarization, the yuan has substantial room for appreciation.

It added that China’s global export share has risen steadily in recent years, along with trade and current account surpluses, suggesting the yuan may be below its fair value. Over the past 20–30 years, major manufacturing nations have accumulated large trade surpluses with the U.S., leading to long-term over-allocation to the dollar.

Minsheng Securities said this round of yuan appreciation began after Fed Chair Powell’s dovish turn at the Jackson Hole symposium, followed by active domestic policy guidance reinforcing market confidence in currency stability. The strong rebound in Chinese equities further propelled the yuan’s breakout.

However, some futures market participants warn that a short-term return to the “6 era” (below 7.0) remains uncertain. This appreciation is driven more by policy signals and temporary market sentiment than by sustained, structural improvement in China’s economic fundamentals.

In other words, the temporary stabilization of A-shares has provided a sentiment spillover to the currency market, but this linkage reflects short-term capital flow synchronization rather than an established “economic fundamentals → currency strength” virtuous cycle. Therefore, a rapid return to the “6 era” faces challenges, and a more likely scenario is a gradual convergence toward a fair, equilibrium level.

Bank of America said that while it sees growing interest in USD/CNY downside moves, the buying interest in yuan strength remains tactical and restrained.