The USD/CNH exchange rate has been on a downward trajectory, dropping near the 7 handle, primarily due to the weakness of the US Dollar rather than the strength of the Chinese Yuan. However, the break below this level is considered fragile, as broader foreign exchange (FX) behavior suggests that the Dollar's weakness is the main driver. The performance of cross-rates, such as EUR/CNH, which has shown mostly sideways movement, indicates that the Yuan's strength is not uniform across major currencies. This suggests that any clean break below the 7 level in USD/CNH may not be sustainable once market liquidity improves.
Policy signals have played a role in supporting sentiment. China's decision to maintain benchmark loan prime rates unchanged for a seventh consecutive month indicates that the authorities do not see an immediate need for further monetary easing. The People's Bank of China's use of 'cross-cyclical' policy tools reinforces this message, as policymakers prioritize smoothing over stimulus and are content to wait until next year to consider more forceful support, given that bank margins are already at record lows.
Seasonal factors are also contributing to the demand for the Yuan. Year-end exporter conversions of foreign currency receipts into Yuan have increased spot demand. China's strong bilateral trade surplus with the US, which exceeded USD 1 trillion in the first eleven months of the year, provides an underlying flow-based cushion.
However, structural limits remain a concern. A stronger Yuan would directly impact exporters and growth by raising foreign-currency prices, increasing pressure on firms already grappling with soft demand. This vulnerability was evident in the sharp deterioration of a private manufacturing activity index last month.
Geopolitical and trade considerations could further limit the upside. With the US-China tariff truce set to expire next year, renewed trade tensions would likely force Chinese companies to discount more aggressively, making sustained Yuan appreciation counterproductive.
From a technical perspective, USD/CNH is approaching a key long-term support zone between 6.9709 (2024 low) and the 38.2% retracement of 6.3057 (2022 low) to 7.4287 (2025 high) at 6.9997. Strong support is expected within this zone to contain any significant downside. On the upside, a firm break above the 7.0843 support level, which has turned into resistance, will confirm a short-term bottoming pattern, suggesting that the first leg of the pattern from 7.4287 has likely been completed.
EUR/CNH has been on an upward trajectory since hitting 8.1660 in late November. However, momentum has waned as EUR/CNH struggles to clear the 55-day exponential moving average (EMA) cleanly. Nevertheless, further rise will remain favorable as long as the 8.2041 support holds. Sustained trading above the 55-day EMA will pave the way for the medium-term falling trend line resistance.
A break below the 8.2041 support level, however, would suggest that the recovery has completed, leading to a deeper fall through 8.1660, resuming the correction from 8.4648 (2025 high). A firm break above 8.1660 in EUR/CNH, coupled with a decisive break above 6.9709 in USD/CNH, would, however, be a strong sign of genuine underlying strength in the Yuan.
