Nomura: Raising conviction in bullish offshore yuan trade to maximum: year-end target of 6.50

How has Nomura's trading view changed?

Nomura raised its conviction in a short USD/CNH trade from 4/5 on 22 October to the maximum 5/5, targeting 6.50 by the end of December 2026 and an expected total return of about 3%.
On Nomura's trading portfolio scale, 5/5 corresponds to 100% of the target position; the view rests on the combined expectations of a stronger yuan and a potentially weaker dollar.

In September, Chinese companies' net foreign exchange conversion under trade transactions reached 88.2 billion US dollars, equivalent to 94.7% of the trade surplus after excluding the effect of yuan settlement. Nomura believes this indicates a stronger willingness among companies to repatriate and convert their dollar holdings, and demand could remain strong in the coming months.
Over the 10 years through 2025, the USD/CNH spot rate fell by an average of 0.67% in November and 0.63% in December, declining in 80% of instances in each month. Nomura believes year-end corporate foreign exchange repatriation and a seasonal widening of the trade surplus could be the reasons.
Nomura expects very large foreign exchange inflows at the end of this year and a potentially record trade surplus; it is also watching the October trade balance, due on 10 November.

Nomura believes the APEC leaders' meeting in Shenzhen from 18 November to the 19th, and an expected meeting between Chinese and US leaders, could make China inclined to support yuan appreciation around the meetings.
For comparison, ahead of the Chinese and US leaders' meeting from 23 September to the 25th, the USD/CNY central parity rate was lowered by a cumulative 345 points over 10 consecutive trading days from 9 September to the 22nd; the dollar index rose about 1.8% over the same period.
Nomura also noted growing international pressure from Europe for yuan appreciation. After reviewing an October document from China's central bank, it concluded that policymakers' concerns about yuan appreciation eroding exporters' margins had eased.

In September, state-owned banks' foreign currency deposits rose by 5.2 billion US dollars, but Nomura estimates that the central bank sold a net 15.4 billion US dollars of foreign exchange reserves over the same period, equivalent on a spot basis to 0.4% of reserves in August. The bank therefore believes the central bank only leaned moderately against yuan appreciation pressure from corporate capital flows.
In discussions with clients in the US in mid-October, Nomura found that, although most were bullish on the offshore yuan, actual positions were limited, and some clients were short the yuan. The bank's trend strategy and client survey indicators show that short USD/CNH positions are far from crowded.
Based on the average of Nomura's four foreign exchange valuation models, the yuan is undervalued by 9.4%; its productivity-adjusted real effective exchange rate model puts the undervaluation at 22.0%.

Nomura's base case is that concerns in the US technology sector and the midterm elections could weaken the dollar, helping the yuan appreciate against it.
If the US technology sector remains stable and energy prices stay high or rise further, the dollar could strengthen unexpectedly. In that scenario, Nomura believes the yuan support factors above could still keep USD/CNH relatively stable.
Actual performance in September provides a reference: the dollar index rose 2.0%, while USD/CNH fell 0.5% over the same period. Relative stability is the bank's assessment under a stronger-dollar scenario, while 6.50 is its year-end trading target.