China's RMB: Modest Yuan Appreciation Accompanied by Two-Way Risks – OCBC Bank

As of now, USD/offshore RMB is trading near 6.72159. OCBC Bank strategists Shen Mo Xiong and Huang Jun Neng note that the currency pair has edged higher, driven by a broader US dollar rebound and stronger US Treasury yields, but remains within a modest range overall. China's central bank continues to guide the yuan along a gradual appreciation path through measures such as fixing rate settings, rather than allowing one-sided rapid gains.

**Central Bank Policy Tone: Gradual Appreciation and Curbing One-Sided Expectations**

Recent policy signals indicate that China's central bank remains vigilant against excessively rapid yuan appreciation. Market reports show that the central bank has lowered the foreign exchange risk reserve ratio for forward FX sales and other measures to reduce corporate forward purchase costs, aiming to stabilize market supply and demand and signal restraint against excessive appreciation. Fixing rate settings have also occasionally been weaker than market expectations, coordinated with state-owned banks' FX purchase activities, to curb speculative one-sided bets and guide a two-way fluctuation pattern. Analysts at China Minsheng Bank have noted that under the dual effects of artificial curbs on sharp appreciation and slowing dollar declines, the yuan may find it difficult to break through specific thresholds in the short term.

**Macro Backdrop Support and External Variables**

A weaker US dollar, phased easing in Sino-US trade tensions, and seasonal year-end corporate FX settlements have constituted the main macro support for the yuan's earlier strength. Multiple foreign institutions, such as Goldman Sachs and Morgan Stanley, have collectively favored the appeal of yuan-denominated assets based on improved corporate earnings and asset hedging demand. However, OCBC Bank strategists caution that two-way risks coexist. If the dollar's rebound momentum persists, or if Sino-US economic and trade negotiations encounter setbacks, both could disrupt the current modest appreciation path. Guolian Minsheng Securities also believes the yuan is more likely to exhibit two-way fluctuations inversely correlated with dollar movements, rather than a one-sided trend.

**Short-Term Outlook: Two-Way Fluctuations vs. Modest Strength**

Dongfang Jincheng analyst Wang Qing points out that the yuan's subsequent trajectory will mainly depend on progress in Sino-US economic and trade dialogue consultations and dollar movements. Despite some Wall Street banks forecasting significant yuan strength, the central bank's aggregate control tone remains unchanged. Overall, USD/offshore RMB may continue to fluctuate within a range near 6.72159 in the short term, with caution warranted over pullback pressure from headwinds such as a dollar rebound under the gradual appreciation theme. Institutions generally believe that between allocation demand and policy resolve, exchange rate flexibility is expected to expand further, but a one-sided market is unlikely to re-emerge.