Offshore Yuan Extends Gains to 4th Session

The offshore yuan strengthened past 6.86 per dollar on Wednesday, marking a fourth consecutive session of gains as strong export growth continued to lift market sentiment despite Middle East tensions. China’s exports surged 21.8% year-on-year to $656.58 billion in January–February 2026, far exceeding forecasts and marking the fastest growth since October 2021. This underscored strong momentum in overseas demand before the outbreak of the Middle East conflict. The US–Israel campaign against Iran entered its 12th day, disrupting global energy markets and effectively closing the Strait of Hormuz. However, China is expected to withstand oil price shocks better than other major economies due to its vast crude stockpiles and diversified energy sources. Meanwhile, imports soared 19.8% to $442.96 billion in the first two months of 2026, far exceeding expectations and marking the strongest import growth since early 2022, driven by resilient domestic demand during the Lunar New Year holiday.

The offshore yuan weakened to around 6.92 per USD on Monday, hitting a four-week low as market uncertainty intensified after oil surged further amid the escalating Middle East war, while investors weighed latest domestic inflation numbers. Data showed China’s consumer inflation accelerated to a three-year high in February, rising 1.3% year-on-year, sharply above January’s 0.2% and forecasts of 0.8%, supported by stronger holiday spending. Meanwhile, factory-gate deflation persisted but eased, falling 0.9% from a year earlier, a smaller drop than January’s 1.4% decline and the expected 1.2% fall, pointing to some stabilization in upstream price pressures. On the geopolitical front, the US-Israeli war with Iran entered its second week with no clear resolution, while major oil producers in the Middle East have been curbing production as shipments through the Strait of Hormuz have been halted. China, the world’s largest energy importer, is partly cushioned by its sizable crude reserves.

The offshore yuan rose to around 6.9 per dollar on Friday, recouping some of the previous session’s losses as market sentiment improved on China’s efforts to expand the currency’s role in international markets. Demand for yuan financing has been supported by Beijing’s low interest-rate environment, where persistent deflation has kept borrowing costs subdued. Moreover, demand has been boosted by investors diversifying beyond the greenback, the PBoC’s recent cross-border financing measures, and economists’ calls for looser capital controls to enhance the yuan’s international appeal. Separately, China’s central government has proposed a defense budget of CNY 1.91 trillion for fiscal year 2026, a 7% growth from the previous year. If approved, it would mark the 11th straight year of single-digit defense spending growth and the smallest gain since 2021. Despite Friday’s rebound, the yuan is set for a weekly decline as the US dollar strengthens on safe-haven demand amid Middle East tensions.