MNI: Yuan Strength To Break 7.0 In Early 2026 - Advisors

The Chinese yuan is expected to strengthen further and move below the 7.0 mark in the first half of 2026 after breaking through the key 7.10 level against the U.S. dollar on Tuesday, while the People’s Bank of China will maintain flexibility to prevent any sharp appreciation from hurting exports, policy advisers and traders told MNI.

The yuan could breach 7.0 against the greenback as early as February next year, around the Spring Festival, marking its first break of the level since September 2022, a forex analyst said, noting that rising cash demand ahead of the holiday typically prompts companies to step up foreign-exchange settlements. 

Businesses are likely to increase this year’s settlements as dollar deposit rates fall following potential U.S. Federal Reserve rate cuts and tighter controls on dollar deposit interest rates by Chinese banks, while market consensus has formed around a weaker dollar next year, prompting firms to accelerate settlements to avoid exchange losses, he added.

The central bank would move to slow the yuan’s appreciation via the daily fixing should it strengthen too rapidly, the analyst said, forecasting the currency may trade in a 6.95-7.23 range in 2026 amid a weaker dollar, stronger foreign inflows linked to the A-share market, and easing China-U.S. tensions. (See MNI: China Promotes FX Hedging As Yuan Swings Seen Growing)

A rebound in equities and a surge in FX settlements pushed USDCNY below 7.10 again on Tuesday, the fourth such move since September. A trader said each retreat above 7.10 has peaked lower than the previous one, with resistance sliding from 7.15 to 7.12. While a break of 7.0 before December-end may be difficult, the appreciation trend is widely recognised, with only the pace uncertain.

MNI reported in September the yuan would likely see moderate near-term appreciation under central bank guidance and capital inflows into A-shares, as the currency rallied toward 7.12 against the dollar. (See MNI: Fixing Price Guides Yuan Rally, Pressure Ahead In Q4)

WEAK DOLLAR

The dollar index could stabilise below 100 if the Fed cuts rates in December, opening further room for yuan gains, the trader added. On Nov. 25, onshore and offshore yuan hit 7.09, their strongest level since November last year. The yuan continued to strengthen on Wednesday breaching 7.08, with USDCNY closing at 7.0802 at 16:00 Beijing time, the lowest level since October 2024. 

The trader said if 7.0 is not breached in February, the next window may come during a possible China visit by U.S. President Donald Trump in April, adding that Tuesday’s rally was partly driven by heavier settlements after phone talks between the Chinese and U.S. leaders.

Rising concerns over a U.S. tech stock bubble have also diverted short-term funds into Hong Kong equities, boosting offshore yuan strength and lifting the onshore market. The trader noted the PBOC set Wednesday’s daily fixing at 7.0796, the strongest since October 2024, signalling tolerance for further appreciation.

SOFT FUNDAMENTALS

An adviser expects the daily fixing to fluctuate between 6.9 and 7.2 next year, with policy remaining flexible amid shifting economic and external conditions, adding the dollar index may move in a 95-100 range. More aggressive Fed rate cuts could put additional pressure on the dollar should the National Economic Council of the U.S. Director Kevin Hassett become Fed Chair next May, the advisor cautioned. 

Despite the improved external environment, weak domestic drivers mean the yuan is unlikely to replicate the strong appreciation seen between 2020 and 2021 when USDCNY dropped to 6.34,  the advisers agreed, adding that insufficient demand-side support for CPI and PPI continues to constrain fundamentals.