Strength in the Chinese yuan is key for broader market sentiment, according to BofA Securities.

The Chinese yuan has recently attracted strong demand, and Bank of America Securities believes this momentum could become a key driver of foreign exchange markets in both the near and longer term. On Tuesday, the People’s Bank of China set the yuan’s daily midpoint at 6.9533 per U.S. dollar—75 pips stronger than the prior fix—marking its firmest level in nearly 33 months and breaking below the 6.96 threshold. BofA analysts cited solid export performance and firmer policy guidance as reasons for upgrading their USD/CNY forecasts to 6.7 for the end of Q3 and Q4, from 6.8.

According to the bank, the yuan’s strength may have broader implications for global FX markets, as signs emerge that appreciation is spreading across trade-weighted measures, including the CFETS basket, and increasingly influencing emerging-market currencies. While correlation does not prove causation, BofA noted that the alignment between bilateral and trade-weighted CNY gains is becoming difficult to ignore. A softer U.S. dollar is further reinforcing EM currency strength alongside the yuan.

High U.S. tariffs have encouraged China to redirect exports from the U.S. toward Europe, a shift reflected in the European Union’s expanding trade deficit with China, now nearing levels last seen during the Covid period. Although part of this imbalance stems from a weaker yuan versus the euro, unlike during the pandemic, the widening deficit has not led to euro weakness. Instead, EUR/CNY has climbed to a ten-year high, intensifying pressure on European exporters and renewing calls for yuan appreciation. BofA expects Chinese export momentum into Europe to continue in the short term, though heightened EU scrutiny and anti-dumping measures could pose challenges over the medium term, potentially placing downward pressure on EUR/CNY.

The case for yuan appreciation is gaining traction, reinforced most recently by comments from President Xi emphasizing the goal of building a “powerful currency” that is widely used in global trade, investment, and foreign exchange markets, and that ultimately achieves reserve-currency status. This builds on Xi’s 2020 remarks outlining China’s ambition to reach high-income status by 2025 and significantly expand economic output by 2035. However, BofA cautioned that aggressive currency appreciation could lead to overvaluation and pose risks to financial stability.

In this context, the outcome of U.S.–China competition in artificial intelligence will be critical for productivity growth and the long-term sustainability of relative currency valuations. Given the continued dominance of the U.S. dollar and the U.S.-centered global financial system, BofA expects USD leadership to persist over the next decade. While full internationalization of the renminbi appears unlikely, a more realistic approach may involve expanding CNY usage across the Global South and Asia, potentially reducing the need for a sharply stronger yuan.

Sources: Peter Nurse