Yuan seen strengthening despite seasonal headwinds as fundamentals and flows dominate.
Earlier:
Summary:
- Strategists see yuan strengthening to ~6.8/USD in Q2
- Defies typical seasonal weakness from tourism and dividends
- Currency up ~3% in Q1 vs peers
- Strong trade performance and widening surplus supportive
- Large FX reserves and undervaluation key pillars
- Limited exposure to energy shock vs peers
- Iran conflict volatility not derailing yuan strength
- Increasingly viewed as regional safe-haven
China’s currency is increasingly being seen as a relative outperformer in Asia, with strategists expecting the yuan to defy its usual seasonal weakness and strengthen further in the coming months.
Analysts at TD Securities and Credit Agricole CIB forecast the yuan to appreciate toward 6.8 per dollar in the second quarter, supported by improving domestic fundamentals and resilience to external shocks, including the ongoing Iran conflict.
The call challenges a well-established seasonal pattern. Historically, the yuan tends to weaken in the second quarter as outbound tourism picks up and dividend-related foreign exchange demand rises. However, strategists argue that this year’s backdrop is materially different, with stronger underlying flows offsetting those pressures.
The currency has already demonstrated notable strength, gaining roughly 3% in the first quarter on a relative basis against its peers. That performance reflects a combination of solid trade dynamics and a widening current account surplus, as exports remain firm despite global uncertainty.
Strategists including Eddie Cheung at Credit Agricole, Wee Khoon Chong at BNY, and Alex Loo at TD Securities point to several structural supports. These include China’s large foreign exchange reserves, continued accumulation of external surpluses, and relatively limited exposure to energy price shocks compared with other economies.
Crucially, the yuan is also seen as undervalued on multiple metrics, providing additional room for appreciation as global investors reassess positioning across emerging market currencies.
The broader geopolitical environment is also shaping flows. While the Iran conflict has injected volatility into global markets, particularly through energy channels, China’s position as a major importer with significant reserves and controlled capital flows has helped insulate its currency. In this context, the yuan is increasingly being viewed as a relative safe harbour within the region.
Taken together, the outlook suggests a shift in the yuan’s traditional behaviour. Rather than weakening on seasonal factors, the currency may instead benefit from a combination of strong external balances, policy stability, and relative insulation from global shocks, supporting further gains through the second quarter.
This article was written by Eamonn Sheridan at investinglive.com.
