Traders Most Optimistic on Yuan in 15 Years: Global Role and Valuation Drive Sentiment

Yuan Gains Momentum as Traders Bet on Stronger Currency

Traders have increased their wagers on a stronger yuan in the coming year, driven by expectations of increased global usage and an attractive valuation. The Chinese currency has risen more than 3% against the dollar this year, fueled by strong tech exports. Now, expectations for further yuan gains over the next year are the most bullish since 2011, according to options pricing.

The one-year dollar-yuan risk reversals, a gauge of positioning and sentiment, traded at 0.37% in favor of puts on Tuesday, reflecting an optimistic outlook for further gains in the offshore Chinese currency. This is a significant increase from 0.05% in favor of puts a month ago. The premium of puts betting on the dollar-yuan pair going lower has widened over calls that look for the pair to rise, despite the US-China summit last month producing few specific results on the currency front.

The offshore yuan traded around 6.76 per dollar on Tuesday, near the strongest in more than three years. Sameer Goel, head of EM and APAC research at Deutsche Bank, believes that the theme of rising currencies in Asia can continue and expects further gains in the yuan versus the dollar towards 6.5 by year-end.

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The Chinese currency's internationalization is a clear policy priority, and an expanded role in cross-border trade and investment will create sustained demand over the years, according to Goel. The yuan is also attractive from a valuation standpoint, he said.

A Bloomberg index of the Chinese yuan's real effective exchange rate shows the currency has strengthened about 3.7% year-to-date versus a basket of its major trading peers, on an inflation-adjusted basis. However, the gauge is now at levels last seen in 2013, when China's trade surplus was about one-fifth of its present level. The yuan's real effective exchange rate is also more than 13% below its historic peak reached in March 2022.

The surge in usage of the Chinese currency in global trade has been especially notable since the Middle East conflict erupted. In March, approximately 920 billion yuan worth of transactions were processed on an average day through the Cross-Border Interbank Payment System, Beijing's global-payments solution for yuan-denominated trades, according to CIPS data. This represents a record high and a more than 48% increase compared with February before the war in Iran broke out.

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The global AI investment boom is also powering a new wave of Chinese exports, making policymakers in Beijing more comfortable with a stronger currency. Samara Hammoud, a currency strategist at the Commonwealth Bank of Australia, expects the yuan to gain into year-end, bucking a stronger dollar. The People's Bank of China has an apparent desire to see further yuan appreciation, Hammoud wrote in an email.