China’s yuan is still undervalued versus the euro despite its recent gains, and that’s contributing to a wider European Union trade deficit, according to Deutsche Bank AG.

The German lender’s analysis indicates the yuan remains cheap relative to the euro, even after appreciating in recent months. This persistent undervaluation makes Chinese exports more competitive in Europe, widening the European Union’s trade gap.

Deutsche Bank AG estimates the currency misalignment is a key factor behind the growing deficit, which has reached record levels. The bank argues that a stronger yuan would help rebalance trade flows, but policy constraints in Beijing limit near-term adjustment.

Investors should monitor potential policy shifts from the People’s Bank of China and any European Union trade responses, as the valuation gap continues to influence bilateral commerce.