“Trust your instincts,” Tom Cruise’s character Maverick tells his fellow naval aviators in the new Top Gun film. That sound advice is equally applicable in foreign exchange trading generally and, right now, specifically regarding prospects for the Chinese yuan. The yuan has broadly traded weaker versus the US dollar this year. That has occurred against a backdrop of a general rise in the value of the dollar, but the US currency has begun to give back ground recently against some other major currencies. That might suggest to some that a renminbi rally is also just around the corner. In reality, just like the pilots in Top Gun: Maverick , the US dollar has been on a steep upwards trajectory. It might now be levelling out, but that doesn’t mean it will go into a downward spiral. And it certainly doesn’t mean the yuan will suddenly reach for the skies. It is indisputable that the US dollar has taken off on the currency markets in recent months, in large part driven by traders’ expectations of materially tighter US monetary policy settings as the Federal Reserve seeks to curb rising inflation in America. In early May, the US dollar index, a measure of its value against a basket of currencies, hit a 20-year high. The yuan is not one of the components of that basket, but nevertheless the US dollar has materially strengthened against the renminbi, too. Last week saw the US dollar give back some of its gains as markets began to compute that the Fed might choose to take its hand off the monetary policy tightening throttle in the second half of 2022. Whether it does so remains to be seen, but with the likes of even the European Central Bank now edging towards a less ultra-accommodative stance, one tailwind that has boosted the US dollar has eased somewhat. But even if the US currency might be about to lose a little altitude on the currency markets, that doesn’t necessarily mean foreign exchanges should flock back into the renminbi. Markets instinctively recognise that it still faces major headwinds. There’s no particular reason for currency market practitioners to react to the critical tone US Secretary of State Antony Blinken adopted towards China in a speech last week. The economic news emerging from China will inform market sentiment towards the yuan, but that news isn’t particularly encouraging. Policymakers in the West might now be viewing Covid-19 through the rear-view mirror, but pandemic containment is still a major issue in China. Beijing continues to adopt rigorous lockdown measures when required and that has inevitably crimped the pace of economic growth. In an attempt to shore up growth while sticking to the Covid-19 containment strategy, Premier Li Keqiang chaired a State Council meeting which rolled out a 33-point package of policy measures aimed at getting “the economy back on a normal track”. Nevertheless, a candid videoconference speech by Li to 100,000 Chinese officials later that week acknowledged it is now conceivable China would not achieve the 2022 target of “around 5.5 per cent” that was unveiled earlier this year. In the meantime, it has not gone unnoticed by markets that profits at China’s industrial companies dropped by 8.5 per cent year on year in April, the biggest slide since March 2020. Chinese industry has been hit hard by elevated raw material prices but also by supply-chain disruption as a result of continuing coronavirus-related lockdowns. 6 ways China can respond to the weakening yuan China’s economic predicament is already popping up on the radar screens of banks, whose opinions register with wider markets. The consensus of a recent Bloomberg poll of economists might be that China will achieve 3.3 per cent growth in the second quarter, but US bank JPMorgan and Swiss private lender Union Bancaire Privée are now both forecasting a contraction. Forecasts are just forecasts, but they can affect sentiment. This is especially so when the financial news cycle, as is currently the case with China, suggests that there’s a good deal of turbulence on the economy’s flight path. For the yuan to mount a sustained rally, it’s insufficient for currency markets to be merely less enamoured with the US dollar. There need to be reasons to buy China’s currency too and, right now, they are somewhat lacking. Trusting their instincts like Maverick, the currency markets might well conclude that even if the US dollar’s upwards trajectory is levelling off, it’s still too early to get back on board the yuan. Neal Kimberley is a commentator on macroeconomics and financial markets