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Barclays predicts a decline in the yuan, noting that markets have not yet adjusted for increased tariffs. While the yuan has demonstrated resilience since the US election, ongoing pressures on China’s balance of payments due to tariffs are expected.
The potential for large-scale trade diversion is reduced compared to the first term of Trump’s presidency. Additionally, China is grappling with challenges such as deflation, weak domestic demand, and a struggling real estate sector.
Barclays anticipates the People’s Bank of China (PBOC) may depreciate the CNY in response to tariffs, although action may be delayed pending further clarity.
Factors behind yuan depreciation outlook
What Barclays is essentially saying is this: while the yuan, or CNY, has held steady lately, this strength may not continue. The reasoning behind this view is rooted in the expectation that global markets haven’t yet fully accounted for the impact of rising tariffs, particularly those targeting Chinese exports. These tariffs are likely to weigh on China’s external accounts, nudging policymakers in Beijing to consider letting the currency weaken to support competitiveness and offset lost demand.
It’s a markedly different setup from 2018. Back then, sudden trade shifts caused sharp movements and surprises. Now, that risk has lessened, thanks in part to how businesses have adjusted their supply chains. Still, the broader picture isn’t encouraging. Inside China, low consumer prices suggest people aren’t spending freely. The real estate sector, long a pillar of economic strength, is limping along. That’s leading to a feedback loop: cautious household spending, weaker corporate earnings, and greater pressure on the central bank to respond.
The People’s Bank of China, if it moves, is expected to do so after waiting for more clarity. That likely means they’re keeping an eye on economic data and international responses before adjusting the currency’s reference rate. From our perspective, what matters most is the time horizon. If the adjustment is seen as delayed, the potential for sudden moves later rises. That brings opportunities, but only if anticipated early.
Volatility positioning and market implications
In the short term, we see room for two-way volatility. The skew in implieds remains modest, which implies the market isn’t fully pricing in a directional break yet. However, as the trade narrative further develops, we expect risk asymmetry to grow. We would discount near-term calm as temporary.
Monetary authorities have so far refrained from aggressive intervention, possibly preferring a managed slide rather than headline-grabbing moves. That said, should external pressure mount, we may witness more forceful communication—or coordinated easing through reserve requirement adjustments or liquidity tools. That opens a path for traders to explore directional views while respecting potential policy action boundaries.
For positioning, short dated options remain underpriced relative to realised moves in the last two months. This suggests that markets are still treating policy volatility as low, despite a backdrop that shows fractures. We are watching skew developments closely, especially in 1-3 month tenors, where asymmetry has historically emerged early in past USD/CNY shifts.
The correlation between the yuan and regional currencies has also begun to weaken slightly. This decoupling, in our view, creates fresh opportunity for relative value setups. If CNY weakens meaningfully, regional peers may not all follow one-to-one, which could support long-volatility expressions in crosses as dispersion picks up.
As we look to the weeks ahead, attention lies not in broad narratives but in data prints and institutional responses. With headline trade rhetoric returning, movements may be more sentiment-driven than fundamental—at least in spurts. But cycle shifts unfold patiently. For now, range-driven expectation trades remain vulnerable. Directional conviction, when paired with macro-confirmed setups, seems more rewarding.
