Maintain Short USD/CNH, Target 6.55, but Near-Term Risks Are Rising
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Maintain Short USD/CNH, Target 6.55, but Near-Term Risks Are Rising
Nomura maintains 4/5 conviction in a short USD/CNH position, expecting the RMB to continue appreciating with support from trade inflows, valuation normalization, and USD weakness, targeting 6.55 by end-October 2026.
- Maintain short USD/CNH with a target of 6.55, implying approximately 3.0% return potential by end-October.
- China's July trade surplus reached USD 112.5 billion, exceeding USD 100 billion for a third consecutive month, while exporter FX-conversion inflows remain strong.
- The average of Nomura's four FX valuation models indicates that the RMB is 8.5% undervalued; productivity-adjusted REER undervaluation may reach 18.7%.
- China equity-related ETF flows have turned net positive, indicating stabilizing foreign inflows.
- U.S. measures toward Iran, potential U.S.-China relationship disruptions, and August dividend-related FX purchases could temporarily support USD/CNH.
Report interpretation
Overview
This report recommends maintaining a short USD/CNH position. The authors believe that although the pace of recent RMB appreciation has slowed and short-term policy, geopolitical, and dividend-season FX-purchase disruptions remain, the medium-term rationale for USD/CNH downside remains largely intact due to a weaker USD, strong Chinese trade inflows, RMB undervaluation, and improved offshore equity fund flows.
Core views
The central view is that the RMB has a foundation for further appreciation: U.S. data and concerns over Federal Reserve independence are biased toward weighing on the USD; Chinese exporter FX conversion and a substantial trade surplus provide FX supply; the RMB is significantly undervalued on a relative basis; and Chinese technology-stock performance and related ETF flows indicate improving foreign-investor sentiment. The report also stresses that short-term exchange-rate stability management, potential U.S. actions targeting Iran and its connections with China, and late-August dividend payments could cause temporary CNH pressure.
Analysis framework
The report combines macroeconomic and policy analysis, cross-border trade and FX-conversion data, FX valuation models, ETF flow tracking, and historical total-return performance of prior short USD/CNH trades to form a directional trading view.
Methodology notes
USD cycle, trade flows and FX conversion
Uses U.S. macro data, monetary-policy expectations, China's trade surplus, and exporter FX conversion to assess directional drivers of USD/CNH.
Degree of RMB undervaluation
The authors use the average result of four FX valuation models to assess the RMB as 8.5% undervalued, while also referencing productivity-adjusted real effective exchange rate valuation.
Offshore equity fund flows
Observes the degree of support for Chinese equity assets and the RMB from foreign investors through net inflows into China-focused and emerging-market equity ETFs.
Short USD/CNH returns across different horizons
The report presents historical total returns for one-month, six-month, and 12-month short USD/CNH positions to validate the trade rationale across different horizons.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- USD/CNHCore trade instrument; recommended short
- Strengths
- Expectations of USD weakness, trade-related FX inflows, RMB undervaluation, and improved offshore equity fund flows all support FX downside.
- Weaknesses
- The pace of RMB appreciation has recently slowed, while the USD/CNY fixing and spot exchange rate have remained relatively stable.
- Comparison
- Relative to the near-term spot trajectory, the authors are more constructive on medium-term FX forward performance; historically, six-month and 12-month short trades both generated positive total returns.
- Risks
- Escalation of U.S. measures toward Iran, China-related restrictions, dividend-season FX purchase demand, and U.S.-China relationship event risk.
- RMBBeneficiary currency of the short USD/CNH trade
- Strengths
- Trade surpluses, exporter FX conversion, undervaluation, and improving Chinese equity fund flows provide support.
- Weaknesses
- Authorities may maintain exchange-rate stability, potentially constraining the near-term pace of appreciation.
- Comparison
- The RMB remains clearly undervalued relative to model valuation; the report also cites the IMF's assessment of RMB real effective exchange rate undervaluation.
- Risks
- Geopolitical shocks, a reversal in equity-market risk appetite, and seasonal FX purchases.
- Chinese EquitiesA supplementary support factor for the RMB
- Strengths
- Chinese technology stocks have performed strongly, and related ETF flows have shifted from near zero to net inflows.
- Weaknesses
- Fund-flow scale remains limited and is highly sensitive to changes in risk appetite.
- Comparison
- In the first week of August, the Shanghai Composite rose 2.8% and the STAR 50 rose 6.6%, outperforming certain Asian markets.
- Risks
- Deteriorating global risk appetite or external policy shocks causing foreign outflows.
Key data
- Trade RecommendationShort USD/CNH, 4/5 convictionMaintains the original directional trade view.
- Target Level6.55The target horizon is end-October 2026.
- Expected ReturnApproximately 3.0%The report's estimated return if the target is reached.
- China's July Trade SurplusUSD 112.5 billionThe third-highest on record and above USD 100 billion for a third consecutive month.
- July Trade Settlement Ratio75%Adjusted for RMB trade settlement; the average over the past three months was 82%.
- RMB Valuation8.5% undervaluedBased on the average of four FX valuation models.
- Productivity-Adjusted REER Valuation18.7% undervaluedThe report's model result.
- China-Focused Equity ETF FlowsUSD 177 million net inflow month-to-date in AugustMeasured over the eight most recent trading days cited in the report.
- Emerging-Market-Focused Equity ETF FlowsUSD 4.2 billion net inflow month-to-date in AugustAs of August 14; these ETFs have relatively high weights in Chinese equities.
Impact & implications
If support from trade and fund flows continues and external risks do not escalate materially, RMB appreciation and USD/CNH downside could resume at a faster pace. Trade execution should account for short-term volatility risk, with policy and geopolitical events treated as key variables affecting position timing.
Risks
- The United States may announce significant measures targeting Iran; if these affect China-Iran trade or payment links, they could strengthen the USD and disrupt U.S.-China relations.
- Dividend payments by major Chinese banks around August 19 and 21 may create temporary FX-purchase demand and weigh on CNH.
- The USD/CNY fixing and onshore exchange rate remain stable, and the pace of RMB appreciation may continue to slow.
- If U.S. economic data or Federal Reserve policy expectations shift in a more USD-supportive direction, the trade rationale could weaken.
- If Chinese equity fund flows and market risk appetite reverse, supplementary support for the RMB could diminish.
What to watch
- A potential Xi–Trump meeting on September 24 and U.S.-China policy signals ahead of it.
- U.S. policy announcements targeting Iran, oil-price reactions, and market risk-aversion sentiment.
- Offshore RMB performance and FX-purchase pressure during major Chinese bank dividend payments.
- China's monthly trade surplus, FX-conversion data, and trade settlement ratio.
- Signals of exchange-rate stability management from the USD/CNY fixing and onshore and offshore RMB exchange rates.
- Fund flows into China-focused and emerging-market-focused ETFs, as well as Chinese technology stocks' performance relative to Asian markets.