UBS has advised its clients to adopt a long position on the USD/CNY currency pair, citing potential policy risks tied to Donald Trump’s upcoming inauguration. In a January 16 research note, the bank emphasized the significance of the event amid a relatively quiet week for economic data.

While Trump’s initial policies remain uncertain, UBS analysts believe major tariff announcements are unlikely on day one. However, they noted that market sentiment remains cautious about possible future actions. The FX market has yet to fully account for significant tariffs, which could weaken the Chinese yuan (CNY) and other growth-sensitive currencies like the euro (EUR).

UBS expects increased volatility in the coming months due to these uncertainties. Rising option volatility reflects growing concerns about diverging U.S. and global economic trends, as well as country-specific risks in nations like the UK and Canada. Any negative developments in the market could further amplify both actual and implied volatility.

The USD/CNY pair recently approached the upper limit of its fixing range. UBS predicts additional pressure on the yuan if Trump’s tariff plans targeting China become clearer. The People’s Bank of China (PBoC) might allow further yuan depreciation to offset the economic impact of potential tariffs.

UBS also highlighted weaker economic fundamentals in China as another factor weighing on the yuan. These challenges could lead to increased demand for foreign exchange and greater capital outflows, further dampening sentiment for the Chinese currency.

The bank suggested a USD/CNH target of 7.50, with an annual carry gain of 2.1%, and recommended a stop-loss at 7.20 to manage risk. As of 09:10 ET (14:10 GMT), USD/CNY was trading slightly lower at 7.3289.

UBS’s strategy reflects broader market concerns as investors brace for potential shifts in U.S.-China trade relations under Trump’s administration.