The Chinese currency, CNY, has experienced small devaluations amid US tariffs but has not undergone a significant decline. As of today, USD/CNY reached 7.35, marking the weakest level since 2007.
The People’s Bank of China (PBoC) has been increasing its USD-CNY fixing, indicating a willingness for gradual devaluation. The daily reference value allows for a 2% fluctuation, and today, the market approached this limit.
Growing Tariff Pressure
With new tariffs added, bringing the total tariff rate on Chinese exports to the US over 100%, further depreciation of the CNY against the US Dollar is expected. The USD/CNH continues to trade above USD/CNY, suggesting speculation of additional fixing rate increases.
What we see is a tightly managed currency edging steadily lower as external pressures intensify. Despite surging tariffs—now stacking up above 100% on Chinese exports to the United States—the yuan has only slipped incrementally. We’ve arrived at a key threshold: USD/CNY touching 7.35, a figure not seen since 2007, underscores how far expectations have shifted.
Zhou at the PBoC appears to be leaning into controlled slippage rather than allowing any abrupt shifts. The central bank’s daily fixings have been set ever higher, almost nudging against the outer bands of the 2% trading limit. This is not a passive move; it’s a tactical release of pressure, aimed at cushioning the export sector without drawing too much attention or risking capital flight. They’re choosing to move just fast enough to send a signal—but not fast enough to provoke panic.
Offshore yuan trading (USD/CNH) remaining on the weaker side of the onshore rate (USD/CNY) tells us something else: markets are betting on further steps in that same direction. When foreign traders are willing to pay a premium outside China, it’s not about scarcity—it’s a forecast. That difference is a thermometer for sentiment, and currently, it’s warm.
Market Strategy Implications
We should treat this current phase as one of creeping recalibration, not market disruption. That means short-dated put spreads and directional delta hedges could become more expensive if expectations get priced-in more quickly, so positioning should emphasise conviction while also accounting for gradual slippage.
The curve appears to anticipate more action by the PBoC, but nothing disorderly. This suggests we’ll need to assess timing rather than direction. Gamma sensitivity near the daily limit matters more now than spot levels. There’s little sign of intervention resistance; we read the fixings as compliant with policy strategy, not as setbacks to it.
From a tactical standpoint, skew remains relatively flat, which implies less fear of abrupt breakouts, and instead supports structure around controlled drift. That invites strategies which harness gentle directional bias with limit-bound range exposure. However, given that we’re already brushing against the upper bound, upside protection for near-term volatility seems underpriced.
The next few weeks may pack further policy guidance—be it through statements or open market operations. For now, implieds are understated given recent volatility. The gap between realised and implied is widening, which introduces mispricing opportunities for those trading delta-neutral structures. Positioning should remain tight but responsive to the fixing.
