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Chinese Yuan Strengthens After Bullish Goldman Sachs Forecast, Trade Data

July 15, 2020 at 13:50 by Andrew Moran

Chinese yuan denominationsThe Chinese yuan is strengthening against multiple currency counterparts midweek following a bullish forecast by a Wall Street titan. Trade data also came in better than expected on Wednesday, leaving analysts to surmise that the economic rebound is running full steam ahead. The real test, however, will be later this week when several crucial numbers come out, including the gross domestic product.

The Chinese yuan captured forex news headlines on Wednesday when Goldman Sachs projected that the currency would experience considerable appreciation against the US dollar over the next 12 months. The financial institution estimates that the yuan could rally to 6.7 per dollar by the middle of 2021, mainly through the health of the world’s second-largest economy.

Zach Pandl, co-head of global foreign exchange, rates and emerging market strategy at Goldman Sachs, told CNBC that he thinks “the domestic picture in China actually looks pretty solid,” noting that the rebound is witnessing a “pretty good rebound.”

The only thing holding us back really from enthusiasm around the currency is tensions with the United States ahead of the November election.

If I could set those aside, and I think when you look 12 months ahead you can look through that to some degree. I think it actually does look like a pretty reasonable outlook for the yuan here.

What could prevent the yuan from regaining its strength? Goldman Sachs alluded to the situation surrounding the coronavirus, which would force investors to see refuge in the greenback. The other issue could be the relationship between Washington and Beijing heading into the 2020 presidential election, and it would not matter if former Vice President Joe Biden wins because it would merely involve different tactics.

I don’t think Biden is going to approach the bilateral relationship in a completely different way, but his tactics will be quite a bit different.

Last week, President Donald Trump revealed that a second phase trade agreement with Beijing was no longer a priority, leading to concerns the next edition of a comprehensive deal would not happen. Financial markets dismissed the president’s remarks, but it has sparked more of a focus on the data to determine if China is meeting the provisions of phase one.

The yuan has stabilized since it started to crater in July 2018. Over the last 12 months, the yuan has seesawed above and below the imperative seven mark. The yuan is also down 0.3% year-to-date.

The People’s Bank of China (PBoC) recently confirmed that additional emergency stimulus would be unnecessary moving forward since the metrics show that the national economy is proceeding as expected. This would be a boon for a yuan because an ultra-aggressive accommodative policy typically depreciates the currency.

According to the General Administration of Customs, China’s trade surplus narrowed to $46.42 billion in June, falling short of market forecasts of $58.6 billion. Exports increased by 0.5% year-over-year, beating the median estimate of -1.5%. Imports climbed at an annualized rate of 2.7%, coming in better than economists’ projections of a 10% decline.

On Thursday, industrial production, second-quarter GDP, unemployment, and retail sales data will be released. The initial estimates anticipate an expansion in industrial output and economic growth.

The USD/CNY currency pair tumbled 0.3% to 6.9868, from an opening of 7.0074, at 12:39 GMT on Thursday. The EUR/CNY rose 0.1% to 7.9914, from an opening of 7.9896.

If you have any questions, comments, or opinions regarding the Chinese Yuan, feel free to post them using the commentary form below.

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