Renminbi: A Good Start After the Holiday

The first day of the Year of the Horse, the Chinese Renminbi performed strongly. In the afternoon, it broke through the major psychological levels of 6.89 and 6.88, appreciating 200 pips intraday, with the closing price reaching a new high since April 2023.

1. Customer foreign exchange settlement remains the main driver

The latest published January 2026 foreign exchange settlement and sales data continues to show strong performance. In January, banks recorded a net settlement surplus of $88.8 billion, a slight decline from December 2025’s $99.9 billion, but still the second-highest since January 2013.

Notably, two key data points hit record highs since records began in 2010:

1. Net settlement under securities investment: $25.9 billion. This reflects restored confidence from foreign investors in Chinese assets, accelerating their allocation of RMB assets.

2. Forward net settlement: $39.3 billion. With the Fed’s rate cut expectations, USDCNY swap points have risen significantly compared to two years ago, and forward settlement costs have decreased. Coupled with market consensus on RMB appreciation, export companies are no longer holding onto foreign currency and are locking in future exchange rates early. This also explains why USDCNY swap points have come under pressure after January.

2. Marginal improvement in the external trade environment

After the U.S. Supreme Court ruled that IEEPA tariffs were illegal, tariffs on China and some EM countries decreased. Although Trump immediately announced a new 15% global tariff, it is 5% lower than the previous 20% tariffs (10% equivalent tariffs + 10% Fentanyl tax). Considering Trump’s planned visit to China at the end of March, the likelihood of further additional tariffs on China in the near term is low, boosting market confidence.

3. What does the options market indicate?

However, the options market shows a seemingly contradictory signal. While RMB continues to appreciate, the USDCNH RR (Risk Reversal) has been rising steadily (USD Call options are more expensive than Puts), with divergence between SPOT and RR trends.

I believe that the rising RR should not be simply interpreted as market expectations of RMB depreciation in the future, but rather as foreign investors’ hedging demand for currency risk when buying Chinese assets.

As mentioned earlier, net settlement under securities investment hit a record high, with large amounts of overseas funds heavily allocating to Chinese assets. For foreign investors holding RMB assets, the main risk is RMB depreciation leading to asset devaluation. To hedge this risk, they need to buy USD Call options in the options market. This large, rigid hedging demand pushes up Call prices, resulting in higher RR.

A rising RR presents a good hedging opportunity for foreign exchange settlement clients. They can use a risk reversal hedging strategy (sell Call + buy Put) to lock in part of the exchange rate risk.

4. Summary

The RMB’s appreciation is driven partly by supply and demand factors in foreign exchange settlement, and partly by marginal improvements in the external trade environment. The rise in USDCNH RR in the options market also indirectly confirms foreign capital inflows hedging needs. For clients involved in foreign exchange settlement, this is an opportunity to capitalize on RR increases by using risk reversal strategies to lock in some forward settlement exposure.

Source: Good Morning Forex

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Market risks are inherent; investments should be cautious. This article does not constitute personal investment advice and does not consider individual users’ specific investment goals, financial situations, or needs. Users should consider whether any opinions, views, or conclusions herein are suitable for their particular circumstances. Invest accordingly at your own risk.