CNY Exchange Rate: Easing Middle East Geopolitical Tensions Disrupt the US Dollar Index

[Market Recap] In the previous trading session, the USD/CNY pair generally trended lower in a volatile manner. Onshore CNY closed at 6.7572 against the USD at 16:30, up 44 basis points from the prior session and marking its highest level since early February 2023. It ended the overnight session at 6.7568. The central parity rate for CNY against the USD was set at 6.8088, 21 basis points stronger than the previous day. At the close of New York trading, the DXY dollar index fell 0.13% to 99.67.

[Key Drivers] US-Iran tensions continue to ease, with Iran announcing it will reopen the Strait of Hormuz for all commercial vessels, significantly alleviating market concerns over inflationary pressures. However, the dollar index did not sustain its decline and rebounded intraday, indicating that geopolitical risk premiums have not fully dissipated, as markets remain cautious about the subsequent signing and implementation of any agreement. Overall, the easing of Middle East tensions has only caused short-term volatility; the dollar index’s future direction hinges primarily on upcoming US inflation data, with this week’s FOMC meeting being a key focus. For the renminbi, attention should be paid to today’s release of domestic economic data to further validate underlying fundamentals.

[Strategy Recommendations] In the short term, exporters are advised to opportunistically lock in forward foreign exchange settlements in batches near 6.81 to hedge against potential CNY depreciation and associated revenue erosion. Importers may consider implementing a rolling FX purchase strategy around the 6.75 level.

[Key News]

1) The US Vice President stated the Strait of Hormuz will remain 'open and free for passage indefinitely,' while Iran said it would charge shipping service fees; nuclear negotiations and sanctions relief are expected to begin within 60 days. Regarding when Hormuz will fully reopen, G7 allies remain pessimistic; senior US officials noted a noticeable increase in shipping activity may take about two weeks, with full recovery to pre-conflict levels taking longer. In after-hours US trading, Iranian media reported explosions heard south of Qeshm Island.

2) Trump threatened to impose a 100% tariff on French wine: 'Scrap the digital tax or stay out of the US market,' prompting Macron to refuse compromise.

3) This week’s FOMC meeting is full of suspense! Will Waller’s first move as Chair be to stop explaining everything?

4) The Bank of Japan is virtually certain to raise interest rates on Tuesday, potentially ushering in a return to the 1% rate era.

Author: Nan Hua Research Institute, Pan Xiang (Registration No. Z0021448)

Important Disclaimer: The content and opinions in this article are for learning and reference purposes only and do not constitute any investment advice. The market carries risks, and investments should be made with caution.

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