The offshore yuan is weakening beyond 6.71 per US dollar, approaching a three-week low as renewed US dollar strength combines with uncertainty over the future of the US-China trade truce.

The dollar is gaining support from a sharp increase in expectations for Federal Reserve tightening. Markets are now pricing approximately a 70% probability of a Fed rate increase in October, up from around 55% just one day earlier. Rising US rate expectations are strengthening the dollar’s yield advantage and creating additional pressure on emerging-market and Asian currencies.

Trade relations between Washington and Beijing are adding another layer of uncertainty. US Treasury Secretary Scott Bessent has said that the United States and China agreed to extend their existing trade truce by two months, through January 10. However, China has not publicly confirmed the stated expiration date.

The reported extension is also shorter than the three-to-six-month continuation that some US officials had previously suggested, leaving markets uncertain about the durability of the agreement.

Attention is now turning toward the broader US-China relationship and the possibility of a Trump-Xi summit, with artificial intelligence, Iran, Taiwan and wider economic relations expected to feature in discussions.

Market Snapshot

Current USD/CNH Price Action

USD/CNH is moving above 6.71, keeping the offshore yuan under pressure as the US dollar gains momentum.

The latest move reflects a combination of stronger US rate expectations and uncertainty surrounding US-China trade relations. The rapid increase in expectations for an October Federal Reserve rate hike has strengthened the dollar’s position across global currency markets.

For the offshore yuan, the impact is particularly important because the currency remains highly sensitive to changes in the dollar, global capital flows and expectations surrounding Chinese economic conditions.

The 6.71 area is therefore becoming an important near-term reference. A sustained move higher in USD/CNH would indicate continued yuan weakness, while a reversal back below this area could signal that the latest dollar-driven move is beginning to lose momentum.

Fed Expectations Strengthen Dollar Support

The most immediate external pressure on the yuan is the renewed hawkish shift in Federal Reserve expectations.

Markets are now pricing around a 70% probability of a rate increase in October, compared with approximately 55% previously.

The sharp adjustment means US interest-rate expectations are moving rapidly, increasing the potential yield advantage of dollar assets.

If US economic data continues to show resilience and inflation remains persistent, expectations for further Fed tightening could remain elevated.

That would provide continued support for the dollar and make it more difficult for the offshore yuan to establish a sustained recovery.

US-China Trade Truce Remains Uncertain

Trade relations are adding another source of volatility.

US Treasury Secretary Scott Bessent has stated that Washington and Beijing agreed to extend the trade truce through January 10.

However, China has not publicly confirmed the expiration date, leaving some uncertainty over the precise terms and duration of the arrangement.

The reported extension is also shorter than the three-to-six-month continuation that had previously been suggested by some US officials.

For currency markets, the distinction matters because a short extension reduces the amount of time available for negotiations over broader trade issues.

Any indication that the agreement could be extended again would reduce some of the immediate pressure on Chinese assets. Conversely, renewed trade tensions could increase demand for the US dollar and weigh further on the yuan.

Trump-Xi Summit Remains a Market Focus

Expectations surrounding a potential Trump-Xi summit remain relatively subdued, but the meeting could become an important catalyst for currency markets if it takes place.

Potential areas of discussion include:

• Artificial intelligence
• Iran
• Taiwan
• Trade and tariffs
• Broader economic relations
• Bilateral economic stability

The significance for the yuan will depend less on the meeting itself than on whether negotiations produce concrete progress on the broader US-China relationship.

A more constructive tone could support risk appetite and reduce pressure on the yuan, while renewed disagreements could quickly strengthen demand for the dollar.

China’s Policy Response Remains Important

The People’s Bank of China continues to have an important role in determining the pace and direction of yuan movements.

Unlike fully free-floating currencies, the yuan operates within a managed exchange-rate framework, meaning domestic policy settings and the daily reference-rate mechanism can influence market expectations.

This becomes particularly relevant when global dollar strength increases rapidly.

If authorities seek to limit excessive yuan volatility, policy signals could help stabilise USD/CNH even while the dollar remains strong internationally.

Bullish Sentiment

1. US Rate Expectations Are Rising

Markets are now pricing approximately a 70% probability of an October Fed hike, providing renewed support for the US dollar.

2. US Treasury Yields Can Support Dollar Demand

Higher US yields increase the relative attractiveness of dollar assets and can encourage capital flows toward the US currency.

3. Trade Truce Uncertainty Creates Yuan Risk

The lack of public confirmation from China regarding the reported January 10 expiration date leaves uncertainty surrounding the durability of the agreement.

4. The Reported Extension Is Shorter Than Some Expectations

A two-month extension is shorter than the three-to-six-month continuation previously suggested by some US officials, keeping longer-term trade uncertainty alive.

5. Global Risk Aversion Could Favour the Dollar

Any deterioration in geopolitical or trade sentiment could increase demand for the US dollar at the expense of the yuan.

Bearish Sentiment

1. Trade Truce Extension Could Reduce Immediate Trade Risk

If the reported extension is confirmed and negotiations continue without major disruption, the reduction in immediate tariff risk could improve sentiment toward Chinese assets.

2. A Trump-Xi Meeting Could Produce Positive Signals

Any concrete progress on bilateral economic relations could reduce demand for defensive dollar positions and support the yuan.

3. Fed Expectations Could Reverse

If upcoming US data weakens materially, markets could reduce expectations for additional Federal Reserve tightening, removing some of the dollar’s current support.

4. Chinese Policy Can Limit Excessive Currency Volatility

Policy measures from Chinese authorities could help contain rapid yuan depreciation if movements become disorderly.

5. A Dollar Pullback Could Quickly Benefit the Yuan

Given the yuan’s sensitivity to broad dollar movements, a reversal in USD strength could produce a recovery in offshore yuan valuations even without a major improvement in Chinese domestic fundamentals.

Price Forecast: What Traders Are Watching

The move above 6.71 places the next phase of USD/CNH trading firmly in focus.

A sustained move higher would reinforce the current yuan weakness and indicate that stronger US rate expectations are continuing to dominate the currency relationship.

A reversal below 6.71 would suggest that the latest dollar rally is losing momentum and could open the way for consolidation as traders reassess the Fed outlook and US-China negotiations.

The main scenarios are:

Yuan-negative scenario: US economic data remains strong, Fed hike expectations increase further and uncertainty over the trade truce persists, pushing USD/CNH higher.

Stabilisation scenario: The trade truce extension is confirmed, US-China negotiations remain constructive and the yuan stabilises despite elevated US rate expectations.

Yuan-recovery scenario: US economic data weakens, Fed tightening expectations decline and progress in US-China negotiations improves risk appetite, allowing USD/CNH to retreat.

Supply Outlook

Currency supply will remain heavily influenced by capital flows between Chinese and US assets.

Higher US interest rates can increase demand for dollar assets, placing upward pressure on USD/CNH.

The Chinese policy response will also remain important. If authorities prioritise currency stability, the yuan could remain more resilient than broader market fundamentals might otherwise suggest.

Demand Outlook

Demand for the yuan will depend on expectations for Chinese economic stability, trade relations and global risk appetite.

A stable trade relationship with the United States could support demand for Chinese assets, while greater uncertainty could encourage investors to increase dollar exposure.

The offshore market may remain particularly sensitive to changes in international positioning because USD/CNH responds rapidly to global dollar flows and shifts in expectations.

Market Outlook for the Coming Sessions

The offshore yuan enters the coming sessions under pressure, with 6.71 acting as an important reference point while the US dollar strengthens.

The biggest near-term catalyst is likely to remain the Federal Reserve outlook. A further increase in expectations for October tightening could extend dollar strength and keep USD/CNH elevated.

At the same time, traders will closely monitor developments surrounding the reported US-China trade truce extension and any progress toward a Trump-Xi meeting.

The central question is whether improving trade stability can offset the growing US interest-rate advantage.

If the dollar continues strengthening while trade negotiations remain uncertain, the yuan could face additional downside pressure. Conversely, a softer US rate outlook combined with constructive US-China developments could allow the yuan to stabilise.

Currency Hedger View

The offshore yuan is particularly relevant for businesses involved in China-US trade, Asian supply chains, international procurement and cross-border payments.

The current market demonstrates how quickly FX exposure can change when interest-rate expectations and trade policy move simultaneously. A stronger US dollar can increase the cost of dollar-denominated imports for Chinese counterparties, while changes in the yuan can alter the effective value of international invoices and settlements.

Currency Hedger monitors global FX markets, central-bank policy, commodities, geopolitical developments and international trade conditions to help businesses assess currency exposure and manage cross-border payments.

For more information on managing international currency requirements, visit Currency Hedger.

Analysis Louis Roche – Today Markets

The offshore yuan is weakening beyond 6.71 as a stronger US dollar combines with renewed Federal Reserve tightening expectations and uncertainty surrounding the US-China trade relationship.

The increase in October Fed hike expectations from 55% to around 70% has quickly strengthened the dollar’s yield advantage, creating a significant external headwind for the yuan.

Meanwhile, the reported extension of the US-China trade truce through January 10 provides some immediate stability but remains subject to uncertainty because China has not publicly confirmed the stated expiration date. The shorter extension also leaves the broader trade relationship unresolved.

For the coming sessions, US interest-rate expectations, Treasury yields, trade negotiations and any developments surrounding a Trump-Xi meeting will remain the principal drivers of USD/CNH.

The 6.71 area is therefore an important reference for the next phase of the market, with the balance between dollar strength and improving or deteriorating US-China relations likely to determine whether the yuan stabilises or remains under pressure.

Louis Roche – Today Markets

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