Maintain Short USD/CNH, Target 6.55 by End-October 2026, Confidence Level 4/5

Overview

This report presents a tactical FX trade recommendation: maintain a short USD/CNH position. The authors believe that, although the pace of RMB appreciation has recently slowed, a weaker U.S. dollar, trade-related FX conversion inflows, RMB undervaluation, and improving China equity flows still support a medium-term decline in USD/CNH.

Core views

The report maintains a 4/5 confidence level in the short USD/CNH trade, with a target of 6.55 by end-October 2026. Its core rationale includes: weak U.S. economic data and concerns over Fed independence/credibility are bearish for the dollar; China's July trade surplus and export-related FX conversion support the RMB; the RMB remains materially undervalued relative to multiple valuation models; and Chinese technology stock performance and ETF flows indicate that foreign inflows are stabilizing. The authors also emphasize the need to guard against potential U.S. action toward Iran, the impact of related measures on China-U.S. relations and a potential September 24 meeting, as well as short-term FX purchase demand caused by bank dividends in late August.

Analysis framework

Assesses USD/CNH direction and risks using macro fundamentals, cross-border trade and FX conversion data, FX valuation models, equity ETF flows, historical forward-trade returns, and geopolitical events.

Methodology notes

• Fundamental AnalysisMacro and External Balance Analysis

  Evaluates exchange-rate drivers using U.S. macro data, China's trade surplus, and export-related FX conversion.

  U.S. nonfarm payrolls and core inflation affect expectations for Fed policy; China's trade surplus and FX conversion ratio are used to gauge flow support for the RMB.

• Valuation AnalysisFX Valuation Models

  Measures the extent of RMB misalignment using four FX valuation models and the productivity-adjusted real effective exchange rate.

  The report estimates that the RMB is undervalued by 8.5% on average and that the productivity-adjusted REER is undervalued by 18.7%.

• Flow AnalysisETF Flow Tracking

  Monitors foreign capital flows through China-focused and emerging-market-focused equity ETFs.

  Used to assess foreign risk appetite for China's equity market and its potential support for the RMB.

• Technical and Market FactorsForward Trade Returns and Event-Risk Assessment

  References cumulative returns from short USD/CNH positions across different tenors and assesses trade risks in conjunction with the dividend season and geopolitical events.

  The trade recommendation will be reassessed as markets and events develop.

Asset mapping & comparison

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

• USD/CNH

  Recommended short position, meaning bullish CNH and bearish USD

  Strengths

  Expectations of a weaker dollar, trade surpluses and export-related FX conversion, RMB undervaluation, and stabilizing foreign inflows all provide support.

  Weaknesses

  The pace of RMB appreciation has slowed markedly recently, while the official fixing and onshore exchange rate have remained relatively stable.

  Comparison

  Compared with short-term spot volatility, the authors are more positive on medium-term FX forward performance.

  Risks

  Escalating U.S. measures against Iran, related sanctions on China or worsening China-U.S. relations, dividend-season FX purchase demand, and a stronger safe-haven dollar.

Key data

• Trade RecommendationShort USD/CNHConfidence level maintained at 4/5.
• Target Level6.55Target horizon is end-October 2026, with an expected return of approximately 3.0%.
• China's July Trade SurplusUSD112.5bnThe third-highest on record and above USD100bn for the third consecutive month.
• July Trade Settlement Ratio75%Adjusted for RMB trade settlement; the average over the past three months was 82%.
• Average RMB Undervaluation8.5%Based on the average of four FX valuation models.
• Productivity-Adjusted REER Undervaluation18.7%The report's model estimate.
• IMF Assessment of RMB Undervaluation21.3%The report cites the IMF's July 29, 2026 External Sector Report.
• China-Focused Equity ETF FlowsUSD177mnModest net inflows over the most recent eight trading days referenced in the report as of August.
• Emerging-Market-Focused Equity ETF FlowsUSD4.2bnMonth-to-date net inflows through August 14; such ETFs have a high weighting in Chinese equities.
• Historical Trade ReturnsShort 6-month USD/CNH approximately +2.4%; short 12-month USD/CNH approximately +4.1%Calculated from January 5, 2026 and August 21, 2025, respectively.

Impact & implications

If U.S. and geopolitical risks do not deteriorate materially, strong trade inflows, a correction of RMB undervaluation, and improved equity flows could drive USD/CNH lower. Short-term volatility may still be affected by policy statements, risk-aversion sentiment, and corporate dividend-related FX purchases, so risk events should be monitored continuously.

Risks

• The United States may announce significant measures targeting Iran; if the situation escalates, safe-haven demand could support the dollar.
• If Iran-related policy involves Chinese entities or payment institutions, it could disrupt China-U.S. relations and expectations for a potential September 24 meeting.
• Dividend payments by large Chinese banks in late August could trigger temporary FX purchase demand and weigh on CNH performance in the short term.
• If U.S. economic data or expectations for Fed policy shift in a more hawkish direction, the rationale for a weaker dollar could weaken.
• Historical returns and model valuations for FX strategies do not guarantee future performance.

What to watch

• The latest developments in U.S. policy toward Iran and the situation in the Middle East.
• Changes in China-U.S. relations and progress toward a potential leaders' meeting on September 24, 2026.
• The USD/CNY fixing, onshore and offshore RMB trends, and the pace of RMB appreciation.
• China's trade surplus, exporter FX conversion ratio, and cross-border capital flows.
• Flows into China-focused and emerging-market ETFs, as well as China equity market performance.
• The impact of large-bank dividend payments around August 19–21 on offshore RMB liquidity.
• U.S. employment and inflation data, as well as September FOMC policy signals.