Please download PDF from above for the themes of the year & the following currencies.

Australian dollar // New Zealand dollar //Canadian dollar // Norwegian krone // Swedish Krona // Swiss franc // Czech koruna // Hungarian forint //Polish zloty // Romanian leu // Russian rouble // South African rand // Turkish lira // Indian rupee // Indonesian rupiah // Malaysian ringgit // Philippine peso //Singapore dollar // South Korean won // Taiwan dollar // Thai baht // Vietnamese dong // Argentine peso // Brazilian real // Chilean peso // Mexican peso // Crude oil // Saudi riyal // Egyptian pound

Annual Foreign Exchange Outlook

DEREK HALPENNY
Head of Research, Global Markets EMEA and International Securities

Global Markets Research
Global Markets Division for EMEA
E: derek.halpenny@uk.mufg.jp

LEE HARDMAN
Senior Currency Analyst

Global Markets Research
Global Markets Division for EMEA
E: lee.hardman@uk.mufg.jp

GEORGE GONCALVES
Head of U.S. Macro Strategy

Institutional Client Group
MUFG Securities Americas, Inc
E: george.goncalves@mufgsecurities.com

LIN LI
Head of Global Markets Research Asia

Global Markets Research
Global Markets Division for Asia
E: lin_li@hk.mufg.jp

KHANG SEK LEE
Associate

Global Markets Research
Global Markets Division for Asia
E: KhangSek_Lee@hk.mufg.jp

MICHAEL WAN
Senior Currency Analyst

Global Markets Research
Global Markets Division for Asia
E: ｍichael_wan@sg.mufg.jp

LLOYD CHAN
Senior Currency Analyst

Global Markets Research
Global Markets Division for Asia
E: lloyd_chan@sg.mufg.jp

SOOJIN KIM
Analyst, ESG and Emerging Markets Research – EMEA

DIFC Branch – Dubai
E: soojin.kim@ae.mufg.jp

_{MUFG Bank, Ltd.
A member of MUFG, a global financial group}

January 2026

2026 THEMES

In this, the first edition of Foreign Exchange Outlook in 2026, as in previous years we have added an additional section – 2026 Themes. This year we are focusing on one over-arching theme – ‘Debt sustainability & fiscal policy – macro & markets impact in 2026’. This theme is then analysed across the regions from our global team in the US, Europe and Asia.

USD DEPRECIATION TO EXTEND FURTHER

After surging by 7.0% in 2024, the US dollar depreciated by 9.4% (DXY basis) in 2025 and we expect that depreciation to extend further this year. The decline of the dollar in 2025 was the largest since 2017. We are projecting a more modest decline for the dollar this year – around 5.0%, reflecting the view of further weakness in the US labour market prompting the Fed to cut a further three-to-four times this year – more than is currently priced by the market. It is also safe to assume there will be further US-policy flashpoints that will unfold this year – some anticipated (Fed Chair pick; Supreme Court ruling-triggered trade policy uncertainties) and some unanticipated (we have already had one with the attack on Venezuela; although market implications have been negligible so far). While we may see some renewed trade policy uncertainties we doubt it will reach 2025 levels and hence the global backdrop relative to the US should also prove more supportive for US dollar weakness. Fiscal policy support in the US, Europe, Japan and China along with the lagged impact of monetary easing will prove supportive for global growth.

EUR TO BREAK ABOVE 1.2000

The 1.2000-level has proved important for EUR/USD historically. The pre-negative rate period saw EUR/USD generally trading above that level while the negative rate period through to the global inflation shock saw EUR/USD below this level. Foreign investors have returned to European bond and equity markets and ECB policy stability with inflation at target will likely see this capital inflow continue (especially if peace in Ukraine is achieved) and will be a key support for EUR/USD.

JPY TO STRENGTHEN AS BOJ DOES MORE

The unfavourable policy mix (loose monetary policy and expansionary fiscal policy) continues to keep yields in Japan excessively low in real terms. We assume the BoJ will do more to address this and added to Fed cuts should see USD/JPY decline.

CNY APPRECIATION BIAS

Potential more proactive fiscal policy and a continued rebalancing for a better growth model and growth in 2026 likely provide some tailwinds for CNY. The extent of appreciation, however, is likely limited. We anticipate persistent, though less severe, deflation throughout 2026, with the GDP deflator not expected to turn positive until 2027. Risks to the currency outlook depend heavily on the level of policy support, broader U.S. dollar performance, and external market conditions.

Forecast rates against the US dollar - End-Q1 to End-Q4 2026

Notes: All FX rates are expressed as units of currency per US dollar bar EUR, GBP, AUD and NZD which are expressed as dollars per unit of currency. Data source spot close; Bloomberg closing rate as of 13:00pm London time, except VND which is local onshore closing rate.

2026

Theme 1:  Debt sustainability & fiscal policy – a G4 FX perspective

• US fiscal outlook unsustainable but US dollar impact limited
• UK fiscal credibility has improved; political risks a key GBP 2026 threat
• JPY risks are the greatest given threat of JGB market disruption in 2026

Theme 2: China’s 2026 fiscal strategy: striking a dynamic balance among three key objectives

• China’s 2026 fiscal strategy will navigate a dynamic balance among three key objectives: counter-cyclical growth stabilization, cross-cyclical economic structural rebalancing, and long-term fiscal sustainability.
• Ongoing debt risk mitigation will remain in 2026. Intensified government measures, like 10 trillion CNY debt-swap program and major banks’ core tier-1 capital replenishment, helped to mitigate systemic debt risks in 2025.
• We expect the budgeted fiscal deficit-to-GDP ratio for 2026 to remain at 4.0% or slightly higher (4.0-4.5%). Projection for the augmented/“broad” fiscal deficit ratio for 2026 suggests an increase to 9.0% (up from 2025’s 8.4%), driven by modest increase in special bonds quotas.
• The targeted 2026 fiscal policy is positioned to lift the Chinese economy from its Q4 2025 cyclical trough, delivering a measured economic recovery and supporting a moderately stronger CNY against the USD.

Theme 3: Years of US fiscal support requires domestic buyers & lower rates

• Foreign investors no longer need to reach for yield like they did post GFC when global rates were near zero. With other sovereign long-term rates rising or higher than the average of the last decade now presenting an alternative to USTs. This can lead to less foreign demand and reinforce steeper curves and push up US term premium levels. It will also result in the need for more US-based domestic buyers and eventually even the Fed (via some form of fiscal dominance) to buy USTs to fund the deficits.

Theme 4: Where are fiscal risks greater for Emerging Market currencies?

• EM currencies, sovereign bonds and equities all outperformed in 2025 but will upward momentum continue in 2026?
• Fiscal risks have not been an important driver of EM FX performance although that could change in 2026.
• Fiscal & domestic political risks are likely to be more pronounced for the BRL, COP, and HUF. In contrast, the ZAR, CLP, CZK and PEN have more solid or improving fiscal fundamentals.

US dollar

MARKET UPDATE

In 2025 the US dollar weakened notably against the euro in terms of London closing rates from 1.0400 to 1.1756. The intra-day high was 1.1919 in September and the intra-day low was 1.0141 in February. The dollar weakened only very marginally against the yen from 156.78 to 156.59. The intra-day high was 158.87 in January and the intra-day low was 139.89 in April. The FOMC cut the federal funds rate by 75bps to 3.50%-3.75%. QT was terminated effective 1st December but at the December FOMC meeting the Fed announced a Reserve Management Purchase (RMPs) program to ensure “ample” bank reserves remain in the system. This will involve mainly purchases of T-bills (starting at USD 40bn per month) but could extend out the curve up to 3 years. The aim is to align balance sheet growth with nominal GDP.

OUTLOOK

The US dollar, on a DXY basis, declined by 9.4% in 2025, the largest drop for the dollar since 2017 – Trump’s first year in his first term in office. What followed after 2017 were years of US dollar rebound. We doubt that will be the case this time and we see a fundamental backdrop that will be quite different. The Fed was tightening policy in 2017-19 but the Fed is now in an easing cycle and we see the FOMC cutting by more than currently priced in the rates market – that will be a key catalyst for the extension of the dollar weakness in 2026. Based on Fed Chair Powell’s estimate of a 60k over-report of NFPs, the US economy is shedding jobs and it would be very unusual to see improvement with the monetary stance still restrictive. While the US economy will benefit from fiscal support through the One Big Beautiful Bill, many other economies globally will also benefit – fiscal expansion is set to support economic growth in China, Japan, Germany, the UK and Australia. Global growth should hold up well, limiting foreign currency selling versus the US dollar. Fed independence doubts is set to be a theme – while the new Fed Chair is just one FOMC vote, there is likely to be increased efforts by the Trump administration to alter the Fed monetary policy framework. Scott Bessent indicated in December a wish for the 2% inflation target regime to be altered. This topic and renewed trade uncertainty as the Supreme Court rules against IEEPA (our view) add to dollar uncertainties.

We believe ‘peak dollar’ has passed and further declines lie ahead as the dollar’s valuation adjusts back to equilibrium levels. The two previous clear peaks in USD REER in 1985 and 2002 were followed by four years (1985-88) and three years (2002-04) of annual declines for the dollar. Given the extreme valuation for the dollar hit in Jan 2025 we see scope for a multi-year drop. The long-term average for the Fed’s REER is 101 versus a current level of 115.

We are more cautious on the extent of dollar depreciation this year (DXY -4.9%) but assuming the Fed acts as we expect and global growth holds up reasonably well (around 3.0%), there is scope for further dollar depreciation this year.

INTEREST RATE OUTLOOK

* Interest rate assumptions incorporated into MUFG foreign exchange forecasts.

Once again, we expect the Fed to deliver 3-4 more rate cuts over the course of 2026 in an aim of heading towards (and then later slightly under) neutral, but the sequence and timing of cuts remain unclear. There is a risk of temporary pauses (likely January and potentially in April as well) prior to the June meeting when a new Fed Chair ushers in a (potentially) new lower rates regime. There will be a new Fed Chair (likely announced early in 2026) and the potential for other appointments which may alter the Fed composition. There is a risk of more dissenting votes if the new Fed Chair argues for an even more dovish stance on policy than the macro picture warrants. We argue pre-emptive liquidity injection move gives the option for outright QE later if needed. A combination of jumping ahead and pricing in the rate cutting path towards neutral already (given that forward rates have been straddling +/- the 3% level all year) has resulted in a tight range and lower vol. The key thing to watch is the 3m T-bill rate here. Overall, we see 2s10s steepening further to a move over 100bp.

(George Goncalves)

FED REAL EFFECTIVE EXCHANGE RATE

Source: MUFG GMR, Bloomberg

US PRIVATE EMPLOYMENT GROWTH

Source: Bloomberg, Macrobond

Japanese yen

MARKET UPDATE

In 2025 the yen strengthened marginally against the US dollar in terms of London closing rates, from 156.78 to 156.59. The intra-day high was 158.87 in January and the intra-day low was 139.89 in April. However, the yen weakened notably against the euro from 163.05 to 184.09. The intra-day high was 184.92 in December and the intra-day low was 154.80 in February. The BoJ raised the key policy rate by 25bps twice, in January and December, taking the policy rate to 0.75%, the highest level since 1995. In July, the BoJ announced that it would slow the pace of reduction in monthly purchases in JGBs from JPY 400bn per quarter to JPY 200bn effective Q2 2026. As a result of the policy to reduce JGB holdings, total JGBs held on the balance sheet declined from JPY 582.4trn at the end of 2024 to JPY 560.8trn as of 20th December, a 3.7% decline.

OUTLOOK

The yen ended 2025 close to unchanged versus the US dollar (+0.1%) in a year when the dollar plunged with the yen performing nearly as poorly as the dollar and next worst performing G10 currency. The yen strengthened in the first half of 2025 and then traded in a 145-150 range before breaking higher following the election of Sanae Takaichi as PM. The ‘reflationist’ focus of fiscal policy saw JGB yields jump and the yen weaken notably. This development has only reinforced the fear of the BoJ being behind the curve and we see a continuation of this as a key near-term downside risk for the yen. Annual nationwide core CPI remains elevated at 3.0%, where it started 2025, and hence with the BoJ policy rate in real terms still very negative, the expansion of fiscal policy under PM Takaichi is eroding confidence in the yen and fuelling selling appetite. A policy shift may be ultimately required in order to fuel a more sustained recovery in the yen.

The OIS market is currently priced for the next rate hike coming in July and we see a high risk of that next rate hike coming sooner. A Q2 hike seems more likely to us. Possibly in April when the updated forecasts will be published and a fuller picture on the outcome of the ‘shunto’ wage negotiations will be available. The danger otherwise would be a loss of support for the government due to the continued weakness of the yen. A sooner rate hike would help alleviate the concerns that the BoJ is being influenced by the Takaichi administration to ‘go slow’ in raising rates in order to drive a government ‘reflationist’ approach to economic policy. A more credible policy mix would help provide support for the JGB market, contain yields from an excessive rise and ultimately improve confidence in the yen.

Based on our view of the Fed cutting rates by more than currently priced, we see scope for USD/JPY to drop this year. However, the Fed has lowered rates by 175bps since September 2024, which indicates to us that a more credible policy mix in Japan is important also. We assume this will materialise and help lift the yen.

INTEREST RATE OUTLOOK

* Interest rate assumptions incorporated into MUFG foreign exchange forecasts.

The 10-year JGB yield increased in 2025 by 97bps to close at 2.07%, the highest closing rate since January 1999. The calendar year gain for the 10-year yield was the largest since 1994. The 10-year JGB yield has now recorded calendar year gains for six consecutive years, a record in data going back to 1968. Bond investors have been spooked by the stickiness of inflation in Japan and in addition fears have grown over the slow, cautious pace of monetary tightening. Investors will increasingly ponder the theory of Japan suffering from ‘fiscal dominance’ – a scenario in which monetary policy is kept looser to reduce debt servicing costs but at the expense of higher inflation. The uncertainty over the approach of monetary policy, at a time when the BoJ is conducting QT, has resulted in less domestic investor demand for longer-term JGBs. The primary buyer of longer-term JGBs has been foreign investors. We assume additional monetary tightening this year will help alleviate these concerns with a much more modest increase in yields as inflation fears recede as actual inflation slows and the yen recovers.

JAPAN CPI YOY, %

Source: Bloomberg, Macrobond

ANNUAL CHANGE IN THE 10‑YEAR JGB YIELD

Source: Bloomberg, Macrobond

Euro

MARKET UPDATE

In 2025 the euro strengthened notably against the US dollar in terms of London closing rates from 1.0400 to 1.1756. The intra-day high was 1.1919 in September and the intra-day low was 1.0141 in February. Following the aggressive policy tightening in 2022 and 2023 the ECB continued the easing cycle that commenced in 2024, by cutting a further 100bps in 2025 taking the deposit rate from 3.00% to 2.00%. The cumulative easing amounted to 200bps over 2024-25. QT proceeded throughout the year with the Asset Purchase Program (APP) and PEPP reduced in size helping to shrink the overall size of the ECB’s balance sheet. Total assets on the ECB’s balance sheet fell by EUR 193.5bn in 2025 as of 26^th Dec.

OUTLOOK

The euro gained sharply versus the US dollar in the period from March to June capturing the Germany fiscal stimulus announcement and then the Liberation Day tariff turmoil in April/May. The EUR/USD rate was broadly in a 1.1500-1.1800 range from July onwards, and we expect the fundamental backdrop to be supportive of an eventual break higher from here. The EUR 1 trillion fiscal spending program on infrastructure and defence in Germany will result in a notable pick-up in GDP growth (0.3% last year to 1.0% this year) while the broader euro-zone economy should benefit from the success of the ECB in returning inflation to the 2.0% target. There are risks that inflation could fall further, thus helping lift real incomes and supporting household spending. The global crude oil glut expected this year is likely to keep energy prices under downward pressure, wage tracking data points to slower wage growth and our view on FX will help disinflationary pressures. We see the ECB as on hold this year as any miss to the downside for inflation is unlikely to be large and persistent, and GDP growth should reduce the need for additional rate cuts. As the ECB has stated over recent months, monetary policy is in a “good place”.

We doubt France’s uncertain political climate will have much impact on EUR performance. 2027 will be a bigger year with the presidential election and the potential of a Le Pen or Bardella victory. Even then we are not sure this will be as disruptive for the financial markets as it would have been in the past. The potential end of political gridlock could ultimately be a positive. In the meantime we see conditions in place for the potential pick-up in EUR demand from central banks. Assuming dollar reserves continue to decline (our view) we see the euro better positioned to take up a greater role in diversification. It remains the second largest currency in reserves but well below the pre-GCF peak of around 28% and the end negative rates and economic stability could see a return of central banks.

EUR/USD closed the year strongly and there is a clear seasonal bias favouring EUR into year-end. On the other hand, the worst period for the EUR is Jan-Feb so we may initially see some correction lower but ultimately the favourable fundamental backdrop will see gains materialise, and we expect around a 5% gain this year.

INTEREST RATE OUTLOOK

* Interest rate assumptions incorporated into MUFG foreign exchange forecasts.

The 10-year bund yield increased in 2025, by 49bps to close at 2.86%. On a closing basis, the range for the 10-year bund yield was 2.36% to 2.90% so the closing level was very close to the high of the year. There were two notable periods of increase in yields – in March after the fiscal stimulus announcement (EUR 1 trillion package) which saw a very abrupt move higher, and then in October to December when financial market participants began to incorporate a view that the ECB monetary easing cycle has come to an end. The 10-year bund yield jumped 20bps in December fuelled by ECB hawkish comments. ECB Executive Board member Isabel Schnabel’s comment that she understood market pricing implying the next policy change will be a hike had a big impact. However, we do not expect a hike this year although we have removed our previous forecast of another rate cut. With the ECB on hold this year as inflation declines modestly further should help anchor longer-term yields in Germany. A stronger currency, a further decline in energy prices and a modest slowing in inflation should see a small decline in yields this year.

NET CHANGE IN FX RESERVE EXPECTATIONS BY CURRENCY (12–24 MTHS)

Source: OMFIF GPI 2025

ECB HAWK‑DOVE SCORE VS. 2‑YEAR EURO GOVT BOND

Source: Bloomberg, Macrobond

Pound Sterling

MARKET UPDATE

In 2025 the pound strengthened sharply against the US dollar in terms of London closing rates from 1.2538 to 1.3468. The intra-day high was 1.3789 in July and the intra-day low was 1.2100 in January. However, the pound weakened against the euro from 0.8295 to 0.8729. The intra-day high was 0.8865 in November, and the intra-day low was 0.8241 in March. The MPC, after raising the Bank Rate aggressively from 2021 to 2023, cut by 50bps in 2024 and followed that up with a further 100bps of cuts in 2025, which took the policy rate down to 3.75% by year-end. In September, the BoE announced a reduction in the pace of QT from GBP 100bn per year to GBP 70bn. This slowdown in the overall pace does still mean the amount of outright sales of Gilts in 2026 will actually increase from approx. GBP 13bn in 2025 to GBP 21bn in 2026. Catherine Mann voted for a pace of GBP 62bn to keep outright sales equal.

OUTLOOK

The pound advanced versus the dollar but fell versus the euro with the overall performance lagging within the G10 performance table. The performance for the pound was a story of two halves in 2025. It outperformed in H1 increasing by nearly 10% but then weakened in H2 when it was the third worst performing G10 currency. The strong rebound in UK GDP growth in Q1 (0.7% Q/Q) helped restore some confidence in the pound but growth was much weaker from Q2 onwards which contributed to renewed concerns over fiscal sustainability. The government addressed this with an Autumn budget that saw tax increases that voters viewed as a breach in the spirit of the election manifesto promises (big tax increases but not specifically on income, VAT and NICs). While the Gilt market responded positively, the unpopularity of PM Starmer has only increased. We see increased political risks with the potential of a Labour party leadership election, possibly after the local elections in May. With Reform so far ahead in the polls, pressure will inevitably build for a change in leadership. This may prove counter-productive, increasing fiscal uncertainty and resulting in renewed GBP underperformance.

We see the OIS curve as under-priced for what the BoE can potentially deliver in cuts. 40bps of cuts are priced by year-end but we see two 25bp cuts being delivered possibly by around mid-year, or by August. The evidence in the data released for last year indicates that wage growth is finally slowing more meaningfully and this should see services inflation slow and MPC concerns over sticky inflation ease. The MPC is still divided (as seen in the 5-4 vote to cut in Dec) but the hawks should start to acknowledge the inflation progress by being more supportive of cuts. We assume a terminal rate of 3.25% but the risk here is that the BoE has the scope to lower the policy rate to 3.00% if inflation declines are more broad-based and growth is weaker.

Given our broader weaker US dollar view we see scope for GBP/USD to advance this year. We believe the UK rates market is assuming a too cautious profile for BoE rate cuts, and more active easing, should result in EUR/GBP drifting higher.

INTEREST RATE OUTLOOK

* Interest rate assumptions incorporated into MUFG foreign exchange forecasts.

After jumping by over 100bps in 2024, the 10-year Gilt yield declined in 2025, by 9bps to close at 4.48%. The 10-year yield surged at the start of 2025 as fiscal concerns escalated and again following Liberation Day volatility but ultimately moved lower as data in Q4 began to indicate a more compelling drop in wage growth and inflation. An Autumn budget that contained notable tax rises also helped to drive yields lower although we see risks of fiscal uncertainties re-emerging this year that could impact Gilt market performance. The Autumn budget may have helped ease fiscal concerns, but that was at a political cost with voters seeing the tax rises as a breach of the spirit of the election manifesto. The Reform party remains well ahead in the polls and poor local election results in May could be the catalyst for a leadership election that would likely see government policies shift to the left. That said, we still expect yields over the whole of 2026 to decline given we see two (& risk of three) rate cuts from the BoE with inflation subsiding back close to the 2.0% target. Fiscal concerns will likely emerge from time to time but ultimately lower BoE rates and slowing inflation will prove most important, resulting in a modest decline in UK yields.

UK GDP QOQ, %

Source: Bloomberg, Macrobond

UK POLLING: YOUGOV VOTING INTENTIONS

Source: Bloomberg, Macrobond

Chinese renminbi

MARKET UPDATE

In 2025, the Chinese yuan strengthened against the dollar by 4.3%, with USD/CNY moving from 7.2993 to 6.9880. In the year, the PBoC lowered the benchmark 7-day reverse repo rate by 10bps to 1.40% in May as well as cutting RRR by 50bps, and lowering 1Y and 5Y LPR by 10bps to 3.00% and 3.50% respectively.

OUTLOOK

While the economic growth in 1H 2025 was strong (5.3%yoy) driven by front-loaded bond issuance and exports amidst in the face of increased US tariffs, the continued property downturn and fading fiscal impulse in 2H have led to increased downward pressure on the economy. Notably, FAI was on track for a growth contraction in 2025 though partly attributed to crowding-out effect due to local government’s debt-swap programs and anti-involution campaign, whereas retail sales growth was softer towards end of year due to diminished impact of consumer goods trade-in program. Exports however held up better than expected with strong exports diversification offsetting the drag from weaker US demand. Exports growth of 5.4%yoy for the first 11 months of 2025 nearly matched the 5.9% growth in 2024.

In early 2026, we should see the economy bottom out with the implementation of the two “RMB 500bn” stimulus introduced in Sep-Oct 2025 alongside front-loaded 2026 bonds issuance in Q1, representing more proactive fiscal policy in 2026. The overall tone of the 2025 December Politburo meeting and annual CEWC is positive for growth, signaling policy continuity into 2026 with “more proactive fiscal policy” and “moderately loose monetary policy”. The CEWC readout also suggests potential incremental measures to stabilize the real estate sector, with December’s announcement of a lower VAT (from previously 5% to 3%) for the sales of housing properties with an ownership less than two years being one example.

CNY performance towards the end of 2025 reflected an appreciation bias with the market paying attention to China’s rising AI capabilities and continued economic rebalancing, shrugging off the short-term deterioration in economic fundamentals in Q4. According to IIF data, foreign equity flows into China reversed to a positive inflow of USD 15bn in the first 11 months of 2025, which follows a significant outflow in 2024. We expect China’s asset revaluation theme to continue into 2026 attracting foreign equity inflows, alongside modest FDI inflows given the improved profitability of foreign industrial enterprises. Furthermore, the positive market sentiment towards Chinese assets could be catalysed by the finalized 15^th Five-Year Plan in next March’s NPC meeting as the Plan details out economic priorities and policy reforms. In addition, a narrower negative bond yield spread with the US and a weaker dollar in 2026 are likely to lend support for CNY. That said, we expect the pace of CNY appreciation to remain modest given the PBoC’s policy priority of maintaining a stable currency. We expect USD/CNY to decline to 6.8000 by Q4 2026 (CNY +2.8%).

INTEREST RATE OUTLOOK

* Interest rate assumptions incorporated into MUFG foreign exchange forecasts.

In 2025, the CGB yield curve shifted upwards with 10y yield rising by 18bps to 1.86%. The upward trend for the 10y CGB yield reflects China’s ongoing asset revaluation which saw rotation from bond to equity investment, less-than-expected PBoC rate cuts (only 10bps cut in May) despite the shift of monetary policy stance to “moderately loose”, and the more aggressive anti-involution campaign to curb deflation. Looking ahead into 2026, we expect the PBoC to step up and deliver a total of 30bps cuts in 1H to stimulate growth given the potential restrained fiscal space. The annual CEWC readout mentioned that promoting a stable economic growth and a reasonable rebound in prices are key considerations for monetary policies, and to “flexibly and efficiently utilize a range of policy tools”. As such, we see a limited room for the 10y CGB yield to rise during 1H though front-loaded bond issuance and China’s asset revaluation will add to the upside pressure. With economic growth likely to pick up further alongside inflation later in the year, there is more room for the 10y CGB yield to rise during 2H up to 2.00% by Q4 2026.

FOREIGNERS TURNED NET BUYERS OF CHINESE EQUITIES IN 2025

Source: : IIF, MUFG GMR

CGB YIELD LIKELY TO REMAIN SENSITIVE TO CHINESE EQUITIES IN 2026

Source: : Bloomberg, MUFG GMR

For other currencies outlooks, please download the PDF version attached at the top of this page.