USD/CNY: Gradual reflation and policy easing guide CNY path – MUFG

MUFG’s Lin Li and Khang Sek Lee note that China’s January CPI slowdown was heavily distorted by Chinese New Year base effects, with food and services dragging headline inflation. PPI deflation narrowed on stronger global metals prices and tech-related demand. They expect reflation to remain gradual despite anti-involution measures, while the PBOC’s “moderately loose” stance and upcoming easing should keep USD/CNY on a mild downward path in 2026.

Base effects mask underlying reflation trend

"Looking beyond the January prints, we think the reflation will likely remain gradual despite the ongoing anti-involution campaign."

"In China, the PBOC has reinforced a clear easing bias for 2026, signalling that monetary policy will remain “moderately loose”. China’s GDP slowed to 4.5%yoy in Q4."

"Further policy easing may be needed in H1 2026 to support the economy and revive credit demand."

"In Asia, for People's Bank of China (PBOC) meeting on Feb 20, investors will watch for further monetary easing measures to combat structural slowdowns."

"The PBOC has recently pledged to maintain a "moderately loose" policy to support domestic demand, which could keep the CNY at the lower end of its trading range."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)