Yuan’s Resurgence Sparks Emerging-Market Currency Rally

The People’s Bank of China has set the yuan’s reference rate at its strongest level since November 2024, marking a decisive shift away from months of artificial support. This policy pivot is sending shockwaves through global markets, with the yuan gaining over 2% against the dollar this year—breaking a three-year downward trend.

Hedge funds are rapidly positioning for continued yuan strength, accumulating bullish options contracts betting on the currency breaking through 7 per dollar. The Ripple effects are particularly pronounced in emerging markets, where the MSCI EM Currency Index shows a 30-day correlation of 0.59 with yuan movements—the highest since May 2024.

"China’s currency is now the dominant cross for most EM trades," said Eric Fine of VanEck Associates. "The gravitational pull of yuan movements outweighs even US dollar fluctuations for many developing economies." The index remains up 6.8% year-to-date despite recent quarter fluctuations tied to Fed policy expectations.