Barclays projects the yuan will gain further ground against the dollar in the next few months, though it anticipates the pace of appreciation will be slower than the approximately 6% increase observed over the past year.
The bank points to active management of the currency by China’s central bank as a key reason for the more moderate trajectory. The People’s Bank of China has been setting weaker-than-expected daily reference rates, and Barclays notes the average gap between the actual fixings and market-expected fixings has widened in recent weeks.
According to Barclays, that intervention appears tied to the yuan’s relative strength. The CFETS yuan trade-weighted index has climbed to its highest reading since August 2022, a dynamic that may have prompted the PBOC to counteract quicker appreciation.
Barclays also highlights a divergence in China’s external and domestic performance. While exports remain solid and China continues to record a substantial trade surplus, domestic activity has shown signs of weakening. The bank cautions that with a softer internal economy, China cannot afford to see a meaningful slowdown in export momentum.
One measurable consequence Barclays cites is a potential further slowdown in exporter dollar conversions. The bank says this trend could continue the deceleration already evident in recent months, as shown by a declining foreign-exchange settlement ratio.
Further color on market structure comes from Barclays’ observation that onshore foreign-exchange trading in China is largely driven by financial institutions’ activity. Sentiment indicators for the yuan have shifted as well: three-month 25-delta risk reversal skews, which previously leaned bullish, have begun to move toward a less bullish stance for the currency.
In sum, Barclays expects the yuan to remain on a path of gradual appreciation versus the dollar, but central bank corrective measures and signs of weaker domestic demand suggest the rate of gain will be more measured than the past year’s roughly 6% advance.
Key metrics and observations noted by Barclays
- Wider average deviation between actual and market-expected daily fixings.
- CFETS yuan trade-weighted index at its highest level since August 2022.
- Declining foreign-exchange settlement ratio indicating slower exporter dollar conversions.