Nomura maintains a short USD/CNH call, arguing that balance-of-payments and capital flows still support CNH strength

Overview

This is a Nomura Global Markets Asia FX strategy report focused on the relative strength of offshore RMB (CNH) and downside potential in USD/CNH. The report argues that recent market developments continue to support its bullish-CNH, bearish-USD/CNH view, mainly on the back of improving China capital flows, a more favorable political and policy backdrop, a strong external sector, sustained corporate FX conversion, and still-undervalued RMB valuation.

Core views

The report's core view is that USD/CNH upside is limited, while downside risk is more pronounced if Middle East tensions ease, China-US relations improve, exporter conversion increases, and the USD/CNY fixing continues to move lower. Nomura keeps a moderately confident short USD/CNH trade recommendation, with a target of 6.60 and a time horizon to end-August 2026.

Analysis framework

The report explains CNH outperformance through five threads: first, USD/CNH is less sensitive to dollar strength and more sensitive to dollar weakness; second, China's external trade surplus and net FX trade settlement remain strong; third, capital inflow expectations and trade relations improved after the Xi-Trump meeting; fourth, the USD/CNY fixing continued to move lower even during periods of dollar strength; and fifth, multiple valuation models show the RMB remains meaningfully undervalued.

Methodology notes

• Macroeconomic FX StrategyBalance of Payments and Corporate FX Conversion Analysis

  Assess the support for CNH from corporate flows by looking at the net FX trade settlement surplus, trade surplus adjusted for RMB settlement, exporter repatriation ratio, and importer FX demand ratio.

  In April, the net FX trade settlement surplus was USD 47.7 billion, below the Q1 average of USD 65.3 billion, but still equal to 82.1% of the adjusted trade surplus, indicating that export-related FX supply remains ample.

• Macroeconomic FX StrategyDollar Sensitivity Asymmetry Analysis

  Compare how USD/CNH responds during periods when DXY rises versus when it falls.

  The report notes that USD/CNH sensitivity is about 28% when DXY rises and about 62% when DXY falls, indicating that CNH is relatively resilient in a strong-dollar environment and may appreciate faster when the dollar weakens.

• Valuation FrameworkFour-Model RMB Valuation Analysis

  Use multiple FX valuation models to measure how far RMB deviates from fair value.

  Nomura believes the RMB is undervalued by 9.5% on average, including a 19.3% undervaluation on a productivity-adjusted REER basis, which continues to support medium-term RMB appreciation.

• Fund Flow MonitoringForeign Fund Inflow Tracking for China Equity ETFs

  Monitor foreign inflows into China-related equity ETFs to gauge risk appetite and the capital inflow environment.

  From May 13 to 19, China-related equity ETFs saw a combined inflow of USD 1.8 billion, including a single-day inflow of USD 811 million on May 18, and cumulative inflows of USD 2.2 billion from the start of the month through May 19.

Asset mapping & comparison

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

• CNH / offshore RMB

  Core beneficiary asset

  Strengths

  Supported by balance-of-payments surplus, corporate FX conversion, trade surplus, capital inflows, and undervaluation.

  Weaknesses

  Still exposed in the short term to a stronger dollar, policy constraints, and geopolitical risks.

  Comparison

  The report argues that CNH has outperformed the pressure implied by DXY since the Iran war, and that this has also lifted the CNH CFETS basket.

  Risks

  If the dollar keeps strengthening sharply, China-US relations deteriorate, or exporter conversion falls short of expectations, CNH strength could slow.

• USD/CNH

  Trading instrument recommended for shorting

  Strengths

  Target 6.60 implies about 4.0% expected return, and the report sees limited upside.

  Weaknesses

  Conviction is only 3/5, showing the trade is not highly certain.

  Comparison

  USD/CNH is less sensitive during DXY upswings but more sensitive during DXY declines, creating an asymmetric downside opportunity.

  Risks

  A strong-dollar backdrop could temporarily slow USD/CNH downside; if geopolitical risks drive safe-haven dollar demand higher, the trade could come under pressure.

• China-related equity ETFs

  Capital inflow indicator

  Strengths

  Foreign inflows emerged in mid-May, showing improved risk appetite after the Xi-Trump meeting.

  Weaknesses

  ETF inflows can be volatile in the short term and do not represent all capital flows.

  Comparison

  The latest sizable monthly inflows were in February and March 2025, at USD 4.4 billion and USD 2.5 billion, respectively.

  Risks

  If policy expectations weaken or trade frictions escalate, foreign inflows could reverse.

Key data

• Trade recommendationShort USD/CNH, target 6.60, about 4.0% return by end-August 2026Conviction is rated 3/5, indicating moderate confidence.
• DXY and USD/CNH performanceDXY +1.7%, USD/CNH -0.9%, CNH CFETS basket +1.8%The measurement period runs from February 28, 2026 to May 21, 2026.
• USD/CNH sensitivity to DXYAbout 28% when DXY rises, about 62% when DXY fallsThis suggests that USD/CNH reacts less to dollar strength and more to dollar weakness.
• April net FX trade settlementUSD 47.7 billionThe Q1 average was USD 65.3 billion; this equals 82.1% of the adjusted trade surplus.
• Exporter repatriation ratio50.1%April data; the Q1 average was 55.8%.
• Importer FX demand ratio48.3%April data; the Q1 average was 48.7%, broadly stable.
• 2026 China export growth forecast8.6%Nomura's economics team raised this from 4.0% previously.
• 2026 China full-year trade surplus forecastUSD 1.161 trillionUsed to support the view that the external sector remains strong and FX supply is ample.
• USD/CNY fixing6.8349On May 21, 2026, the lowest level since February 15, 2023.
• RMB valuationUndervalued by 9.5% on average; undervalued by 19.3% on a productivity-adjusted REER basisBased on Nomura's four FX valuation models.

Impact & implications

If the report's view is correct, CNH may continue to outperform other Asian currencies, and short USD/CNH trades remain attractive. A strong trade surplus and exporter conversion imply a solid RMB supply-demand backdrop; meanwhile, easing China-US relations and improving capital inflows could further support risk appetite. For investors, the key implication is that USD/CNH upside risk may be limited, while downside catalysts include easing Middle East tensions, a weaker dollar, stronger exporter conversion, and improved policy expectations.

Risks

• A strong-dollar backdrop may temporarily slow USD/CNH downside.
• If Middle East tensions worsen and increase energy or safe-haven dollar demand, CNH performance may come under pressure.
• If China-US trade relations deteriorate again, capital inflows and the improvement in risk appetite could reverse.
• If exporter conversion activity falls below expectations, support from the balance of payments for CNH will weaken.
• Official fixings and policy constraints may affect the pace of RMB appreciation.

What to watch

• DXY trends and whether USD/CNH sensitivity to DXY rises and falls remains asymmetric.
• China's net FX trade settlement, exporter repatriation ratio, and importer FX demand ratio.
• Whether Middle East tensions ease, especially the impact on energy security and the Strait of Hormuz risk.
• Progress in China-US trade talks, tariff arrangements, and policy communication.
• Foreign inflows into China-related equity ETFs and other cross-border capital flow data.
• Whether the daily USD/CNY fixing continues to move lower and whether model mispricing widens or narrows.