BNY reported an increase in demand for the Chinese yuan since the conflict began. It said this rise was not mainly due to hedge unwinding, and noted that Chinese assets, including equities, have held up. Hedging in the yuan is now about 30% below the rolling one-year average. BNY linked this to the clearing of previously underheld positions.

Yuan Volatility Remains Contained

BNY expects official management of the currency to keep realised volatility low. It also said near-term current-account surpluses across Asia-Pacific face risks from energy bottlenecks, while China is less exposed than peers in North and East Asia. Over time, BNY expects gradual reallocation towards Chinese bonds and equities if market access improves and capital market reforms continue. It added that foreign holdings of Chinese assets remain small compared with holdings of US assets, so larger interest in China would not materially alter overall US portfolio allocations. We have observed a surprising surge in Chinese Yuan buying that is not just from the unwinding of old hedges. With the USD/CNY pair holding steady below 7.20, it seems that the under-hedged positions we saw building in late 2025 have now been cleared. This creates a solid base of support for the currency moving forward. Official management of the yuan is limiting sharp swings, keeping volatility unusually low for the current global environment. One-month implied volatility on USD/CNY is now hovering near 4.8%, a significant drop from the highs seen at the end of last year. This backdrop makes selling volatility, through strategies like short strangles, an attractive proposition for traders who expect this stability to continue.

Capital Flows Support The Yuan

We are also seeing a gradual but consistent flow of capital back into Chinese assets, a trend confirmed by the nearly $12 billion that entered the country’s bond market last month. While these portfolio allocations are still small compared to holdings of U.S. assets, they provide a steady demand for the yuan. This supports the case for positions that benefit from a stable or gently appreciating currency. Looking back to the end of 2025, many market participants were positioned for a weaker yuan due to global trade jitters. With hedging levels still well below their one-year average, there is significant room for corporations and investors to increase their yuan holdings. This suggests that buying call options on the yuan could be a low-cost way to position for a potential catch-up in hedging activity. China’s relative insulation from the energy supply bottlenecks that affected its neighbors in North and East Asia last year continues to be a positive factor. The latest Caixin Manufacturing PMI data showing modest expansion reinforces this view of economic resilience. For derivative traders, this makes long yuan positions a potential hedge against renewed weakness in other Asian currencies. Create your live VT Markets account and start trading now.

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