RMB FX awaits new signals, but the near-term bullish view remains

Overview

This report is J.P. Morgan's China local markets weekly published on June 6, 2026, focusing on the sustainability of the recent RMB appreciation, valuation divergences, and trading strategies. The report notes that since May the RMB fixing has moved lower more quickly, indicating a structural decline in PBoC resistance to further RMB strength and keeping USD/CNH biased lower; however, a stronger USD narrative and the recent sideways fixing have led the market to wait for fresh downside signals.

Core views

The core view is: stay bullish RMB in the short term, but recalibrate forecasts and positioning. The report argues that investor concerns about a rebound in USD/CNH mainly come from two points: first, RMB strength is inconsistent with weakening China activity data; second, widening China-U.S. rate differentials again make rate models suggest a higher USD/CNH. However, the report emphasizes that the RMB is not simply a cyclical currency. Export resilience, foreign portfolio inflows, the positive feedback from Chinese equities and the AI theme, and the possibility that the PBoC places greater weight on a total-return framework all continue to provide fundamental support for RMB strength.

Analysis framework

The report combines the daily PBoC fixing, USD/CNH spot, client surveys, the CNH-CNY basis, SAFE cross-border capital flows, northbound equity flows, China-U.S. rate differentials, FX-rates models, China risk-premium indicators, and CFETS TWI valuation to assess the drivers, crowdedness, and sustainability of RMB strength. In trade expression, the report prefers using options to participate in USD/CNH downside rather than trading against the move solely on rate-differential valuation.

Methodology notes

• FX valuationFX-rates fair value model

  Estimate USD/CNH fair value using rate inputs

  The report says that, assuming the historical FX-rates beta remains unchanged, the latest rate inputs imply USD/CNH fair value of 6.92-7.20, with the current FX rate deviating from rate fundamentals by about 1-3 standard deviations.

• Cross-asset risk premiumMarket-implied China risk premium

  Use the first principal component of returns on China-related assets to measure the disconnect between market pricing and economic data

  This indicator is constructed from the first principal component of returns across six types of China-related assets, including FX, equities, rates, and commodities. The report says that China-related assets have not yet fully repriced weaker activity data recently, pushing the market-implied China risk premium to a recent high.

• Effective exchange rate valuationCFETS TWI trend deviation

  Compare the degree of overvaluation of the RMB trade-weighted index relative to trend

  The report points out that CFETS TWI has risen more than 6% over the past year, but is only about 3.8% above trend, below the extreme level of roughly 13% above trend in early 2022, so the urgency for the PBoC to limit RMB appreciation or guide depreciation is lower.

• Flows and positioningClient surveys, CNH-CNY basis, and SAFE flows

  Use surveys and market indicators to judge whether RMB longs are excessively crowded

  The EM client survey shows investor bullishness on RMB FX at the highest level since 2022, but the CNH-CNY basis remains relatively contained, suggesting speculative froth is less extreme than in past episodes; SAFE data show that April net foreign portfolio inflows were the largest since September 2024, while northbound equity buying is estimated at about +$15bn.

Asset mapping & comparison

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

• USD/CNH

  Core trade expression

  Strengths

  A lower PBoC fixing, foreign inflows, export conversion flows, and the total-return logic for the RMB support downside.

  Weaknesses

  In the short term, the fixing lacks further downside momentum, while USD strength has led to consolidation.

  Comparison

  The rates model shows fair value at 6.92-7.20, above spot, creating a valuation divergence.

  Risks

  A stronger USD narrative, crowded positioning, a shift in PBoC policy signals, or continued weakening in China data.

• USD/CNY

  Forecast target asset

  Strengths

  The report maintains the year-end target of 6.70 and believes the RMB will remain relatively strong in 2H26.

  Weaknesses

  Longer-dated forecasts were revised higher, indicating that the RMB may not fully decouple from the broader USD trend.

  Comparison

  The 1H27 forecast was adjusted to 6.75-6.80, above the year-end target.

  Risks

  Stronger U.S. exceptionalism, incremental Fed hike risk, and renewed widening in China-U.S. rate differentials.

• CNY TWI / CFETS TWI

  RMB effective exchange rate and policy-constraint indicator

  Strengths

  The report expects CNY TWI can still rise further, with current overvaluation relative to trend below the extreme levels seen in 2022.

  Weaknesses

  If TWI continues to rise rapidly, policymakers' tolerance for the pace of appreciation may decline.

  Comparison

  Currently about 3.8% above trend, versus about 13% above trend in early 2022.

  Risks

  If the PBoC re-emphasizes limiting excessive RMB strength, the effective exchange rate path could change.

• Chinese equities

  Flow and sentiment feedback channel for the RMB

  Strengths

  Supported by the AI theme, onshore equities remain resilient, and after RMB appreciation local investors' FX-adjusted returns versus U.S. equities have improved.

  Weaknesses

  Equities have not yet fully reflected weaker activity data, leaving repricing risk.

  Comparison

  Previously, weak equities and RMB depreciation created negative feedback; recently, this has shifted to positive feedback, with equities and the RMB strengthening together.

  Risks

  Cooling of the AI theme, foreign outflows, or further deterioration in economic data would weaken RMB support.

Key data

• Report date2026-06-06Global Markets Strategy weekly report.
• Recent low in USD/CNHBriefly fell below 6.77Then consolidated as the broad USD strengthened and the fixing moved sideways.
• Year-end USD/CNY target6.70The report keeps this target unchanged.
• 1H27 USD/CNY forecast6.75-6.80The back-end forecast was tentatively revised higher, reflecting USD trend and Fed hike risks.
• USD/CNH fair value in the rates model6.92-7.20Based on the latest rate inputs and the historical FX-rates relationship.
• FX-rates divergence1-3 standard deviationsClose to extreme levels in recent years, but the report does not recommend using it mechanically as a contrarian signal.
• Estimated northbound equity flowsabout +$15bnThe report estimates a recovery in northbound equity buying in April.
• CFETS TWI valuationUp more than 6% over the past year, about 3.8% above trendCompared with about 13% above trend in early 2022, the current overvaluation pressure is lighter.

Impact & implications

For investors, the implication is that the RMB long thesis remains intact, but risk-reward now requires more refined management. The report supports continuing to express USD/CNH downside and further CNY TWI strength through options, while warning not to ignore drawdown risks from a reversal in the USD narrative, a repricing of China-U.S. rate differentials, weaker economic data, and crowded positioning. If the expected China-U.S. leaders' visit in September provides an additional catalyst, RMB strength could materialize earlier in 3Q; but after entering 2027, if U.S. exceptionalism and the risk of renewed Fed hikes intensify, USD/CNY is unlikely to move fully against the broader USD trend.

Risks

• A stronger USD narrative could weaken the USD/CNH downside trend.
• Renewed widening in China-U.S. rate differentials makes the rates model show the RMB spot rate as too strong, which could trigger a valuation correction.
• RMB long trades have become crowded, and investors may continue to reduce positions.
• Weaker China activity data have not yet been fully repriced by China-related assets, which could lead to a normalization of the risk premium.
• If the PBoC changes its fixing guidance or more explicitly limits RMB appreciation, RMB strength may be constrained.
• Options strategies involve principal loss, tail-loss risk from selling options, and liquidity risk; some structures are not suitable for all investors.

What to watch

• Whether the daily PBoC fixing resumes accelerating lower or continues to move sideways.
• Whether USD/CNH can obtain fresh downside signals and remain below the recent range.
• Changes in the broad USD trend, U.S. exceptionalism, and Fed hike expectations.
• Whether China-U.S. rate differentials and RMB rates continue to decouple from FX.
• Whether SAFE cross-border flows, northbound equity flows, and global capital continue increasing allocations to China.
• Whether exporters' FX conversion pace and remaining corporate USD savings continue to be released.
• Whether Chinese equities, especially AI-related themes, can maintain resilience.
• Whether the expected China-U.S. leaders' visit in September becomes a catalyst for near-term RMB strength.