Nomura recommends shorting USD/CNH, targeting 6.55 by end-October 2026.

Overview

This is an FX strategy trading report, with the core recommendation to short USD/CNH. Nomura believes supportive factors for the RMB are accumulating, including strong trade-related FX conversion by Chinese corporates, a downward trend in the USD/RMB fixing, greater USD/CNH sensitivity to dollar weakness, potential foreign inflows related to Chinese technology, and stable US-China relations.

Core views

The report's core view is that the dollar may soften in the near term due to weaker-than-expected US June CPI and PPI, while domestic Chinese factors continue to support CNH appreciation. A strong trade surplus is driving corporate FX conversion into RMB, the RMB fixing rises only modestly when the dollar strengthens but declines more clearly when the dollar weakens; meanwhile, progress in Chinese AI models and state-backed support for tech stocks may improve foreign investor sentiment toward Chinese assets.

Analysis framework

The report applies a macro FX trading framework, focusing on Chinese corporates' net FX trade settlement, exporters' remittance ratios, importers' FX purchase demand, USD/CNY fixing behavior, USD/CNH sensitivity to DXY moves, historical comparisons of foreign inflows into Chinese equity ETFs, and RMB valuation models.

Methodology notes

• FX flowsCorporate net FX trade settlement analysis

  Uses corporate FX conversion and FX purchase data to measure how much the trade surplus is being converted into RMB demand.

  The report notes that June's net FX trade settlement surplus was USD81.8bn, equivalent to 92.9% of the trade surplus after adjusting for RMB settlement, indicating that corporates were more willing to convert dollar income into RMB.

• FX policy signalUSD/CNY fixing and fixing error analysis

  Assesses policy bias through changes in the RMB fixing and deviations of actual levels from model-implied forecasts.

  The report believes that when Chinese authorities limit two-way moves in the RMB fixing, the average downward adjustment is larger than the upward adjustment, and positive fixing errors have narrowed versus early June, indicating a downward trend in USD/RMB.

• Market sensitivityComparison of USD/CNH sensitivity to DXY upside versus downside

  Compares USD/CNH moves during periods of DXY gains and declines to judge asymmetric FX responses to dollar direction.

  The report states that when DXY rose 2.1% from June 16 to 24, USD/CNH rose only 0.84%, while when DXY fell 0.64% from June 24 to July 21, USD/CNH fell 0.68%, showing that USD/CNH is more sensitive to DXY declines.

• Valuation methodsAverage of four FX valuation models

  Uses the average of multiple models to judge whether the RMB is undervalued.

  The report says the RMB remains undervalued by 9.7% on average across four FX valuation models and by 20.2% on a productivity-adjusted REER basis, providing valuation support for RMB appreciation.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• USD/CNH

  Core trading instrument; recommended short.

  Strengths

  Strong trade-related FX conversion, firm RMB fixing, high sensitivity to DXY declines, and undervalued RMB valuation.

  Weaknesses

  The dollar may still be supported by safe-haven demand, inflows into US assets, or geopolitical events.

  Comparison

  Compared with periods of DXY gains, USD/CNH shows higher sensitivity during periods of DXY declines.

  Risks

  If the dollar strengthens again, US-China relations deteriorate, or foreign capital does not flow into Chinese assets, the strategy may come under pressure.

• USD/CNY

  Onshore RMB price signal and fixing observation target.

  Strengths

  The fixing rises only modestly when the dollar strengthens, while adjustments are more pronounced in the direction of RMB appreciation.

  Weaknesses

  Authorities may manage the pace of RMB appreciation, limiting the short-term speed of decline.

  Comparison

  USD/CNY tends to trend lower during Asian trading hours, which may reflect onshore corporate FX conversion demand.

  Risks

  If policy shifts toward exchange-rate stability or the dollar strengthens, the decline in USD/CNY may slow.

• Chinese equities and tech stocks

  Potential channel for foreign inflows, indirectly supporting RMB demand.

  Strengths

  Analogies to Kimi K3 and DeepSeek-R1, tech IPOs, and state-backed funding may improve risk appetite.

  Weaknesses

  Such capital flows are still at an early stage; Chinese equity ETFs have still seen net outflows of USD2.1bn month-to-date in July.

  Comparison

  Following the release of DeepSeek-R1, Chinese equity ETFs saw inflows of USD4.4bn and USD2.5bn in February and March 2025, respectively.

  Risks

  If the rebound in tech stocks proves unsustainable or foreign risk appetite weakens, support for the RMB may be weaker than expected.

Key data

• Trade recommendationShort USD/CNHConviction level 3/5, target 6.55.
• Target horizonend-October 2026The report's target price of 6.55 implies about 3.0% return.
• June corporate net FX trade settlement surplusUSD81.8bnIt was USD53.6bn in May and the Q2 average was USD61.0bn.
• Trade surplus conversion ratio92.9%Refers to the proportion relative to the trade surplus after adjusting for RMB settlement.
• Exporter remittance ratio52.5%It was 46.2% in May and the Q2 average was 49.6%.
• Importer FX demand ratio47.0%It was 44.4% in May and the Q2 average was 46.6%.
• USD/CNH sensitivity to DXY upside38%From June 16 to 24, DXY rose 2.1% and USD/CNH rose 0.84%.
• USD/CNH sensitivity to DXY downside106%From June 24 to July 21, DXY fell 0.64% and USD/CNH fell 0.68%.
• RMB valuation undervaluation9.7%Based on the average of four FX valuation models.
• Productivity-adjusted REER undervaluation20.2%The report believes valuation undervaluation supports RMB appreciation.

Impact & implications

If the report's view proves correct, USD/CNH may continue to decline, the attractiveness of RMB assets may improve, and foreign inflows into Chinese equities, especially the technology sector, may also improve. For investors, this strategy primarily expresses a CNH appreciation trade driven by the combination of dollar weakness and RMB fundamental support.

Risks

• The dollar may strengthen again due to geopolitical conflict, safe-haven demand, or inflows into US assets.
• If new political or trade frictions emerge between the US and China, sentiment toward RMB assets may weaken.
• If the intensity of Chinese corporates' FX conversion declines, support for the RMB from the trade surplus may weaken.
• Foreign inflows into Chinese tech stocks are still unconfirmed, and the related positive impact may lag or fall short of expectations.
• Chinese authorities may continue to manage the pace of RMB appreciation, limiting the speed of USD/CNH downside.

What to watch

• Whether Chinese corporates' net FX trade settlement surplus continues to remain elevated.
• Changes in exporters' remittance ratios and importers' FX demand ratios.
• USD/CNY fixing, fixing errors, and spot moves during Asian trading hours.
• The direction of DXY driven by US inflation, rate expectations, and geopolitical events.
• Whether foreign inflows into Chinese tech equity ETFs shift from net outflows to sustained net inflows.
• Signals around high-level US-China interactions and a Trump-Xi Summit around September.
• The actual impact of PBoC RMB internationalization policies and tools such as FIMA RMB Repo.